Rule 144 Gifts—Model Donor Compliance Letters

In our September-October 2011 issue we brought our readers up to speed on the current application of Rule 144 to gifts, including a focus on two “quirks”—traps for the unwary—that can cause headaches/ violations for affiliate donors and their donees, as well as their brokers. (Our readers have our permission to pass that lead article on to others to help prevent inadvertent violations.) In response to the many positive reader responses, we are providing this Special Supplement with model compliance letters applicable to six key donor scenarios, along with some additional explanation. [Note that the letters below assume 1934 Act reporting companies and non-affiliate donees. We have not provided additional letters for non-reporting companies because the great majority of gifts involve reporting companies and the letters can be modified to cover the one-year cutoff for non-reporting companies.]

Four Affiliate Donor Scenarios:

Donor Aggregation Quirk: Beware of the One-Way Aggregation Tail that applies to All Affiliate Gifts for 6/12 Months Following the Gift. As we discussed in our September-October issue, every affiliate gift now has a new “tail” (thanks to a footnote in the 2007 SEC Release adopting the latest Rule 144 amendments) that requires the donor to keep track of—and aggregate with—all donees’ sales for a period of up to 12 months from the date of the gift—even for non-restricted securities. Pursuant to this new standard (which applies to both restricted and non-restricted securities—and no matter how long the donor has held the shares) an affiliate donor is required (as part of the running three-month aggregation requirement limiting the amount of the donor’s Rule 144 sales) to aggregate with the donor’s sales any sales by donees for six months following the gift for reporting issuers (that are current) and one year for all other issuers. Note that we have provided a paragraph below in all four affiliate gift letters to address this. [For donors that make large gifts to multiple donees, this aggregation requirement could limit or even prevent the donor from selling shares because donors must aggregate with, and subtract from their Rule 144 amount limit, all sales made by donees, pledgees, certain family members, etc.]

Control Stock Donee Quirk: Donees of Control Stock Are Stuck (in Donor’s Shoes) with Rule 144 for 6/12 Months from Donor’s Acquisition. As we explained in our September-October issue, the carryover of the Staff’s old, troublesome “stand in the shoes” position on non-restricted securities (“control stock”) gifted by affiliates means that for 6/12 months from the donor’s acquisition of even stock purchased in the open market (or, e.g., received pursuant to a stock option exercise covered by an S-8, etc.), the shares must be sold by the donee pursuant to all of the Rule 144 requirements except the holding period. Letter 3, below, covers that scenario.

Compliance Pointer
Readers may want to furnish these letters now to all your officers and directors as well as the point person at the company who pre-clears all insiders’ transactions. In this way, they will be alert, in advance, to these requirements and prevent potential slip-ups.

LETTER 1. Affiliate Donor, Restricted Securities acquired by Donor more than 12 months ago (1934 Act Reporting Company and Non-Affiliate Donee),

In connection with my gift of____ shares of__________(the “Company”), please note that there are some restrictions that you must adhere to in connection with the sale of these shares:

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