The Process and Restrictions for Reselling Shares Previously Acquired Through a Block Trade

Abstract

This report aims to detail the process for reselling shares acquired through a block trade in the U.S. stock market, with a focus on analyzing the relevant regulatory restrictions, particularly lock-up periods and resale rules¹. As a crucial method for institutional investors to conduct large-scale securities transactions, the subsequent resale of block trade shares is strictly regulated by the U.S. Securities and Exchange Commission (SEC) to maintain market fairness and transparency.

1. Characteristics and Classification of Block Trade Shares

Shares obtained through a block trade may differ in nature from shares purchased on the open market, especially when insiders or private placements are involved³. These shares are typically classified into the following two categories:

• Restricted Securities: These are securities acquired in unregistered, private sales from the issuing company or an affiliate of the issuer⁴. They are commonly obtained through private placements, employee benefit plans (such as stock options), or as consideration in a merger and acquisition transaction⁵. The resale of restricted securities is subject to strict limitations, designed to ensure that all publicly offered securities undergo the SEC registration process to protect investors.

• Control Securities: These are shares held by an affiliate of the issuer, such as a company director, senior executive, or a major shareholder holding more than 10% of the company's voting shares⁷. The resale of control securities is also restricted to prevent insiders from using their position for unfair trading or market manipulation.

Although the block trade records shown in the image do not specify whether the shares in each transaction are restricted or control securities, it is highly likely that such shares are included given the nature of block trades. For instance, in transactions involving "insider sales" or "planned sales," the seller is likely an affiliate of the issuer, and thus the shares sold may be classified as control securities.

2. The Regulatory Framework for Reselling Shares: Rule 144

For the resale of restricted and control securities, the most critical provision in U.S. securities law is Rule 144 of the Securities Act of 1933¹¹. This rule provides a "safe harbor," allowing for the public resale of restricted and control securities without registration, provided certain conditions are met¹².

The main conditions of Rule 144 include:

• Holding Period: Restricted securities must be held for a certain period before they can be resold. For securities of a reporting company (a company that files regular reports with the SEC), the holding period is typically six months. For non-reporting companies, the holding period is one year. The holding period begins on the day the purchaser pays for the securities in full and assumes the economic risk.

  
  

• Current Public Information: At the time of resale, the issuer must have adequate current public information available. For reporting companies, this means they must have filed all required SEC reports (such as Form 10-K and 10-Q) on time.

• Volume Limitations: For control securities (and in some cases, restricted securities that meet other conditions but have not completed the full holding period), the number of shares that can be sold within any three-month period is limited. Typically, the amount sold cannot exceed the greater of 1% of the outstanding shares of that class or the average weekly trading volume over the past four weeks.

  
  

• Manner of Sale: The shares must be sold in "brokers' transactions" or directly to a "market maker". The seller may not solicit buy orders or make any payment in connection with the offer or sale of the securities other than the usual and customary broker’s commission.

  
  

• Notice of Sale: If the number of shares to be sold exceeds 5,000 or the total sale price exceeds $50,000, the seller must file a Form 144 with the SEC.

  
  

3. The Process for Reselling Previously Block-Traded Shares

Assuming the shares from a completed block trade meet the resale conditions of Rule 144, the process for conducting another block trade is similar to the first, but with additional attention to compliance.

3.1 Seller Preparation and Compliance Review

• Confirm Share Type: The seller (typically an institutional investor or a major shareholder) must first determine if their shares are restricted or control securities and whether the Rule 144 holding period has been met.

  
  

• Disclosure Compliance: Ensure the issuer has filed all SEC reports on time and that the seller does not possess any material non-public information. If the seller is an affiliate, they must be particularly cautious about the risk of insider trading.

  
  

• Legal Opinion: Seek professional advice from legal counsel to confirm that all resale conditions have been met and obtain a legal opinion letter to ensure the legality of the transaction.

  
  

3.2 Finding a Counterparty and Negotiation

• Contact a Broker: The seller contacts the block trading desk of their brokerage firm to express their intention to conduct another block trade. The broker will assist the seller with the compliance review.

  
  

• Find a Buyer: The broker leverages their network of institutional clients to find potential buyers willing to purchase a large block of shares. These buyers are typically qualified institutional investors who can understand and accept the resale restrictions on restricted stock, if applicable.

  
  

• Private Negotiation: The buyer and seller negotiate the terms of the trade privately through the broker, including price, quantity, and settlement date. The negotiated price often takes into account the restrictions of Rule 144 and market liquidity.

  
  

3.3 Trade Execution and Reporting

• Trade Execution: Once an agreement is reached, the broker executes the trade. To avoid impacting the public market, the trade is often conducted before the market opens, after it closes, or through dark pools.

  
  

2.Form 144 Filing: If the trade volume meets the filing threshold under Rule 144, the seller must file Form 144 with the SEC before or at the time the trade is executed. This form discloses information about the seller, issuer, number of shares, and the intent to sell.

• Trade Reporting: After the transaction is completed, the broker must report the trade to the relevant exchange or clearinghouse, adhering to their respective reporting time requirements (e.g., futures block trades may need to be reported within 5-15 minutes).

  
  

3.4 Clearing and Settlement

• Clearing: The trade is cleared through a clearinghouse, which guarantees the performance of both parties.

  
  

• Settlement: Stock trades typically follow a T+2 settlement cycle, meaning the exchange of funds and securities is completed on the second business day after the trade date.

4. Restrictions and Considerations

• Lock-up Period: Even if shares are acquired through a block trade, if they are restricted securities, the buyer must still comply with the holding period stipulated by Rule 144. For instance, the lock-up period for U.S. stock block trades is often one year (for non-reporting company shares) or six months (for reporting company shares). During this time, the buyer generally cannot freely resell these shares on the public market.

  
  

• Shareholding Percentage Limits: While the Chinese A-share market has additional restrictions on the percentage of shares that can be sold in a block trade (e.g., not exceeding 3% of a shareholder's holdings), the U.S. market does not have an explicit "block trade shareholding percentage" limit. However, the volume limitations under Rule 144 effectively serve a similar purpose, especially for control securities.

  
  

• Information Asymmetry: Although block trades are intended to be conducted privately, the market may still obtain information through various channels, potentially causing price movements before the trade occurs (a phenomenon known as "front-running").

  
  

• Compliance Risk: Any resale that fails to comply with Rule 144 or other securities laws can lead to severe legal consequences, including fines and market access bars.

  
  

5. Conclusion

Reselling shares previously acquired in a block trade is not a simple repeat operation; it is strictly regulated by U.S. securities laws, particularly Rule 144. After acquiring shares via a block trade, buyers must fully understand their nature (whether they are restricted or control securities) and the corresponding holding period and resale restrictions. When conducting a subsequent block trade, all conditions of Rule 144—including the holding period, public information availability, volume limitations, manner of sale, and notice requirements—must be strictly followed. It is essential to seek help from professional legal and financial advisors to ensure the transaction is compliant and proceeds smoothly.