Corporate & Executive Services

Navigating Stock Restrictions:

Rule 144/145 and 10b5-1 Plans

Company stock often represents a significant portion of the wealth owned Restricted and
control securities
by corporate executives and their families, creating the need for a sound Owners of restricted securities
diversification strategy. Corporate insiders or affiliates,however, face or control securities cannot
multiple restrictions on the sale of their stock. sell the securities to the public
unless the conditions set forth
William Blair works with owners of restricted stock and corporate in SEC Rule 144 (and in some
insiders to help them navigate these barriers and implement a cases Rule 145) have been met.
diversification strategy that is aligned with their wealth management goals. Restricted securities are
securities that were issued
through a private placement
Safe Harbor Conditions for Rule 144 and are not registered with the
SEC. Corporate executives
Rule 144 sets forth “safe harbor” conditions that allow for the sale of restricted or control often receive restricted
securities. If these five conditions are met, then the owner is allowed to sell the securities in
securities through the exercise
the public market. (Rule 145 sets forth conditions that are specific to restricted securities
of stock options, as bonus
obtained as the result of a merger or acquisition.)
compensation, or as the result
Holding period of a corporate merger.
Restricted securities must be held by the owner for at least six months if the company that
Control securities are
issued the stock is subject to the reporting requirements of the Securities Exchange Act of
securities that are owned
1934 or for at least 12 months if the issuer is not subject to those reporting requirements.
The holding period requirement does not apply to control securities that are not restricted. by “corporate affiliates,”
such as officers, board
Adequate current information members, executives, large
The buyer of the stock must have access to adequate current financial information about shareholders, or other people
the company that issued the stock. Companies that file 10-K and 10-Q reports satisfy this with the ability to influence
requirement. the company. Spouses and
Amount to be sold family members who live at
The number of shares that can be sold in any three-month period is limited to the greater of home are also considered to
a) 1% of the outstanding shares of the class of securities being sold or b) the average weekly be corporate affiliates.
trading volume of the shares during the previous four weeks.

Notice filed with SEC

Affiliates must file a notice with the SEC for any sale that involves more than 5,000 shares
or more than $50,000 in aggregate in a three month period. The sale must take place within
three months of filing the notice. If the affiliate decides not to sell any securities during that
timeframe, the affiliate must file an amended notice.

Manner of sale
The sales must be handled in all respects as routine trading transactions, and brokers may
not receive more than a normal commission. Neither the seller nor the broker can solicit
orders to buy the securities.
10b5-1 Plans: Navigating Trading Windows Potential Benefits of
In addition to the rules surrounding the sale of restricted and control stocks, executives 10b5-1 plans:
and other corporate insiders must also work around trading “blackout periods” associated
• Defense against
with the release of quarterly earnings, acquisitions, or other material events affecting the
insider-trading claims
company. These blackout periods can significantly limit the windows of opportunity when
insiders can trade their stock. • Access to secondary markets
Fortunately, 10b5-1 plans allow insiders to trade during the blackout periods without during blackout periods
violating insider-trading laws. Rule 10b5-1 permits insiders to adopt predetermined • Gradual diversification of
written plans for selling or purchasing specified amounts of stocks as long as the person is concentrated equity position
not in possession of material nonpublic information when the plan is adopted. at predictable intervals
• Avoids bunching of sales
Rule 10b5-1 Plans: An Affirmative Defense Against Insider Trading
The rule permits officers and directors of public companies to adopt predetermined written during open trading windows
plans for selling or purchasing specified amounts of stocks as long as the person adopting • M
 itigates signaling issues
the plan is not in possession of material nonpublic information when the plan is adopted. associated with sales by
Rule 10b5-1 plans are an affirmative defense to allegations of insider trading, and the party corporate insiders
claiming the defense must demonstrate that the plan, contract, or instructions either: • Convenience and
•S
 pecified the amounts, prices, and dates for sales or purchases in question predictability of putting the
•U
 sed a written formula or algorithm, or computer program, for determining the sale program on “auto-pilot”
amounts, prices, and dates
•P
 rovided instruction to another person to execute sales or purchases without exercising
any subsequent influence over how, when, or whether to effect the transaction

SEC Rule 10b5 and Rule 10b5-1: Employment of Manipulative and Deceptive Practices
Rule 10b5-1 prohibits the use of “manipulative and deceptive practices” in the sale or
purchase of securities. Rule 10b5-1 defines when a sale or purchase constitutes trading
“on the basis of” material nonpublic information in insider trading cases.

August 2017
This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for
accounting, legal, tax, or investment advice. We recommend consulting your attorney, tax advisor, investment, or other professional
advisor about your particular situation. Investment advice and recommendations can be provided only after careful consideration of
an investor’s objectives, guidelines, and restrictions. Any investment or strategy mentioned herein may not be suitable for every investor,
including retirement strategies. The factual statements herein have been taken from sources we believe to be reliable, but accuracy,
completeness, or interpretation cannot be guaranteed. Past performance is not necessarily an indication of future results. All views
expressed are those of the author, and not necessarily those of William Blair & Company, L.L.C. “William Blair” is a registered trademark
of William Blair & Company, L.L.C.