SEC Rule 10b-5 (fraud) and Regulation D (disclosure requirements) are the federal securities laws people generally pay attention to, principally because when things go wrong (e.g., a start-up fails/never gets market traction), investors look at them for cause to sue.
Rule 144 by comparison is less commonly leveraged as a litigation tool and accordingly, a bit boring. However, because Rule 144 is structurally embedded in the narrative of any venture financing it's useful to understand how it works.
In essence, Rule 144 articulates the statutory requirements for reselling stock received from a company. The relevant context is this: when an investor/founder/employee receives equity in a start-up, it's almost always pursuant to SEC exemption Regulation D (and the attendant state statute); such exemption making it unnecessary for the issuing company to provide otherwise obligatory (and burdensome) disclosures and reports to the investor/founder/employee. The exemption is allowed because such transaction involves a "private" (not generally available to the public) sale to an investor/founder/employee who presumably has enough information and sophistication not to be swindled.
However, once the issuer/founder/employee receives the equity, the SEC has a new worry: that he's not an investor but a bag man. An underwriter. A stooge. The conduit through which the company sells securities to the public absent registration. Hence, Rule 144.
Rule 144 generally applies to "restricted securities" - definitionally interpreted to mean securities that have been issued pursuant to a private and unregistered transaction (such as start up stock).FN1 Rule 144 is a non-exclusive "safe harbor": it sets forth the circumstances by which these restricted securities (often referred to as legend stock (because the certificate received by investor will bear a legend indicating the stock is subject to restrictions), restricted securities or 144 stock) may be sold in the public market without risk of violating federal securities laws.
Historically, law suits in connection with the re-sale of stock in VC or angel funded companies have been uncommon events. Moreover, under the terms of most equity issuances to investors/founders/employees, usually manifested in an Investor Rights Agreement, investor/founder/employee is prohibited from reselling CONTRACTUALLY.FN2 Usually, the terms prohibit resale absent company's permission and subject to the presentation of a legal opinion or SEC "no-action" letter (or equivalent) that the sale is exempt from securities laws.
As a consequence, even though as a technical matter of federal securities laws an investor/employee/founder could (at least in some cases) legally sell his restricted stock pursuant to Reg D (or some equally applicable exemption from federal securities laws), his contractual agreements with the issuing company would probably prohibit it, which means, for all practical purposes, the investor/founder/employee is stuck with the stock until the company reaches some liquidation event - namely an IPO or merger with a public company.FN3
In the event of such an IPO or merger, Rule 144 comes into issue. In both an IPO and a merger, trading of stock acquired before the IPO or merger remains restricted (save some exceptions for shares issued pursuant to Rule 701 (pursuant to a stock option plan)).
Rule 144 has two main requirements in the event of resale after an IPO or merger: that the reseller have held the stock for a certain period prior to the resale and that the reseller only sell a certain amount of stock (known as a selling volume limit).FN4 The former imposes a 6 month (previously 12 month) holding period (that begins when the subject shares are fully paid for) and the latter sets the selling volume limits at greater of 1% of outstanding shares or average reported weekely volume of trading during preceding four weeks (meaning, once the company's stock post IPO or merger is being traded on a public exchange, then the seller's sales of stock can only comprise a small percentage of the trading of the company's stock). Once these requirements are satisfied, the reseller may request the company remove the restrictive legends on his stock certificates, sell to the open market and start living the dream.FN5
FN1. Rule 144(a)(3) identifies what sales produce "restricted securities." Typical examples are VC investments, employee stock option plans, and compensation for professional services. It should be mentioned that Rule 144 also governs "control securities" - defined as those held by someone (such as a director or large SH) in a relationship of control with the issuer (the difference here is one of rationale: the restriction is based on the seller's status (in fact the underlying stock he owns in fact could be registered); for example, if he can or does control the company issuing the stock.
FN2. The company imposes the contractual limitation because the SEC will hold the company responsible for violating the 1933 Act if the holder transfers when he should not.
FN3. The other reasonably foreseeable scenario is a resale to a large bank or bank-like fund via Rule 144A. Rule 144A permits resales of the restricted securities to a "qualified institutional buyer", provided that such QIB be provided certain financial and other information about the issuer. QIB includes any institution that owns and invests on a discretionary basis at least $100 million in securities of nonaffiliated institutions, except that a bank or savings and loan must also have an audited net worth of at least $25 million, along with certain mutual funds and registered dealers.
FN4. In addition to the holding period and volume limitation, there are three other basic requirements: 1) Information about the company must be publicly available for at least 90 days before resales (this generally means the issuer has complied with the periodic reporting requirements of the Securities Exchange Act of 1934), 2) the stock must be sold through brokers or directly to a market-maker (such as an investment banker), and 3) a Form 144 must be filed with the SEC at the time of any sale, with an exception for sales of fewer than 500 shares for less than $10,000.
FN5. It should be noted that contractually (via the purchase agreement and related agreements), most investors/employees/founders are prohibited from selling off their shares immediately after an IPO or merger anyway, via a mechanism called a "lock-up", which varies but usually lasts for about 6 months.
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