Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary
Re: Use of Risk-Reducing Strategies under Rule 144 and Regulation S
File Nos. S7-07-97 and S7-08-97
Ladies and Gentlemen:
This letter sets forth the response of Bear, Stearns & Co. Inc. ("Bear Stearns") to the request of the Securities and Exchange Commission (the "Commission") for comments with respect to certain proposed amendments to Rule 144 ("Rule 144") 1 under the Securities Act of 1933, as amended (the "Securities Act"), and Regulation S ("Regulation S") 2 under the Securities Act. The proposed amendments are contained in Release Nos. 33-7391 (the "Rule 144 Release") and 33-7392 (the "Reg S Release" and, together with the Rule 144 Release, the "Releases"). Although the Releases request comment on a wide range of issues, our comments are directed only to the discussion in the Releases concerning allegedly abusive hedging practices employed by holders of restricted and other securities or their counterparties under Rule 144 and Regulation S.
Risk-reducing strategies used in connection with the holding of securities that were purchased pursuant to Regulation S or the resale of which may be made pursuant to Rule 144 include, among others, equity swaps, 3 hedged Section 4(1-1/2) purchases of restricted or control securities, 4 call options, 5 and cash-settled put and call combinations. 6 As discussed more fully below, Bear Stearns strongly believes that these and other similar risk-reducing strategies have been beneficial to the capital markets and that further regulations are not necessary to promote the policies underlying the Securities Act. Accordingly, Bear Stearns believes that the current regulatory framework works well and respectfully requests that the Commission maintain it, rather than adopt one of the other regulatory approaches set forth in the Rule 144 Release.
Before discussing the reasons why the current system should be maintained, Bear Stearns wishes to note the lack of findings by the Commission or another body showing a widespread use of transactions employing allegedly abusive risk-reducing strategies. The Commission first expressed its concern about the use of risk-reducing strategies with respect to Rule 144 and Regulation S in the 1995 Release and has now reiterated this concern in the Releases. Yet in neither the 1995 Release nor the Releases has the Commission offered any concrete information demonstrating abusive practices.
The Commission's evidence of abuses so far has been either anecdotal in nature or nondispositive. With respect to Rule 144, the Commission has yet to identify any abuses to date relating to hedging activities. With respect to Regulation S, the alleged abuses on which the Commission has typically focused involve purchases of securities by purchasers who do not assume the full economic risk of their investments as a result of their failure to pay fully for those securities. 7 Bear Stearns suggests that the Commission continue to administer the current system of regulation of hedging transactions under Rule 144 and Regulation S, rather than change that system. Unless a body of evidence that demonstrates abuse in both Regulation S and Rule 144 transactions is established, we believe that the benefits to the capital markets from such hedging transactions far outweigh the detriment from sporadic abuse.
In this regard, Bear Stearns further notes that in the Rule 144 Release the Commission has proposed five possible regulatory approaches to deal with hedging activities, the last of which would maintain the status quo. 8 Only one of the approaches that goes beyond the status quo--the reintroduction of the Tolling Provision 9 --was discussed in the 1995 Release. Two of these approaches 10 constitute a much more aggressive regulatory framework than the reintroduction of the Tolling Provision. In light of the fact that the Commission has not proffered additional concrete evidence of abuse since the 1995 Release, the Commission's proposal of the two more aggressive approaches is particularly troublesome.
For the reasons set forth below, Bear Stearns strongly believes that the maintenance of the status quo with respect to risk-reducing strategies is in the best interests of issuers, investors, and the capital markets.
A. Efficiency in Capital Formation.
With the elimination of the Tolling Provision in 1990, the Commission took an important step in making capital markets more efficient in two significant ways. First, the playing field between issuers of unregistered securities and purchasers of unregistered securities was made more level. Prior to 1990, purchasers of unregistered securities were in a position to demand substantial pricing discounts due to the illiquidity of those securities. These discounts directly impacted the proceeds or consideration received by issuers from purchasers in the private equity market. Once the Tolling Provision was eliminated, risk-reducing strategies could be effectively employed. This, in turn, led to a reduction in the illiquidity discounts demanded by purchasers of unregistered securities, thus allowing issuers of those securities to receive greater proceeds through private offerings.
Second, the availability of risk-reducing strategies facilitates the sale of businesses in public and private transactions. Entrepreneurs, for example, who sell their companies in return for unregistered securities of an acquiring corporation can now reduce the risk associated with a large, illiquid position in the stock of the acquiring corporation. They can use the cash they receive as a result of engaging in a hedging transaction to diversify their investment portfolio. This same benefit is also available to executive officers of corporations who receive a large portion of their compensation in the form of restricted stock. 11 Simply put, the introduction of any of the regulatory approaches to hedging that constitute a departure from the status quo could reverse the substantial market efficiency gains made possible through the elimination of the Tolling Provision in 1990.
B. Importance of Time Period as Evidence of Investment Intent Has Declined.
Bear Stearns takes issue with the Commission's view that hedging activities occurring shortly after a purchase of restricted securities 12 could cast doubt upon the investment intent of the purchaser and hence the validity of the transactional exemption upon which the issuer was relying. When Rule 144 was adopted in 1972, the concepts of "investment intent" and securities "coming to rest" were particularly important. These concepts went hand-in-hand with the slow, deliberate registration process that existed at that time. Things have changed significantly since 1972.
Today, a purchaser of restricted securities in a private placement can arrange with an issuer to have a registration statement covering those shares filed the very next day after purchase. If that registration statement is not reviewed by the staff at the Division of Corporation Finance (the "Staff"), it will become effective by the end of the week. Upon effectiveness of that registration statement, the securities can be resold to the public by the original purchaser. In this example, the time period as evidence of "investment intent" is irrelevant, and the resale by the purchaser to the public will not jeopardize the issuer's private placement exemption. The use of shelf registration, such as universal shelf offerings, and Rule 144A offerings together with technological innovations have accelerated the pace of public and private offerings alike in the United States. This has greatly facilitated the rise of the U.S. capital markets to the preeminent position they hold today in the global investment community. Indeed, what took weeks or months to accomplish in 1972 now can be accomplished in a matter of days and, in some cases, hours. Therefore, it is hard to distinguish between participants engaged in these types of transactions from holders of restricted securities who engage either directly or indirectly through a counterparty in risk-reducing strategies soon after their purchase of the securities.
C. Restricted and Control Securities Do Not "Leak" into the Public Market.
As discussed in the Releases, risk-reducing strategies used to hedge restricted or control security positions usually involve short sales. 13 These short sales may be effected by either the securityholder or a counterparty, depending on the circumstances. 14 Short sales effected in connection with risk-reducing strategies result in the sale of unrestricted securities of the same class as the restricted or control securities to purchasers in the marketplace. These short sales are separate and distinct transactions relating to, but not involving, restricted or control security positions and involve only the sale of borrowed unrestricted securities. The short positions created by these sales are covered solely with unrestricted securities of the same class, even after the Rule 144 restrictions on the underlying restricted or control securities expire. 15 Importantly, the number of unrestricted securities being shorted in connection with risk-reducing strategies does not always equal the number of restricted or control securities being hedged.
Market participants are careful to maintain strict separation between restricted or control securities and the unrestricted securities used to cover short positions. Because of this, restricted or control securities do not leak into the public market, and no public distribution into that market occurs. The obligation to maintain such strict separation is clearly on the person engaging in the risk-reducing strategy. Failure to maintain strict separation would result in noncompliance with Section 5 of the Securities Act.
The Commission's suggestion in the Rule 144 Release that, in essence, a short sale of unrestricted securities used to hedge a restricted or control security position constitutes the sale of the underlying restricted or control securities can only be based on concepts of fungibility. As we will discuss in Section H below, the fungibility doctrine was rightfully discredited over two decades ago and should not be resuscitated today.
D. No Harm to Participants or Marketplace.
The direct or indirect participants in any risk-reducing strategy will include the following: (a) the purchaser of the securities sold short; (b) the lender of those securities; (c) the seller of those securities, which can be either the holder of restricted or control securities or a counterparty participating in a risk-reducing strategy initiated by such holder; (d) the issuer of the securities sold short; and (e) persons who currently own securities of the same class as those sold short and who are not involved in the transaction. As discussed below, neither these direct or indirect participants nor the marketplace is harmed as a result of the implementation of any risk-reducing strategy.
The purchaser of the securities sold short has made a conscious investment decision to purchase publicly traded securities based on publicly available information concerning the issuer. This purchaser has voluntarily chosen to bear the risk of a price decline of those securities in order to participate in any price appreciation of those securities. He or she also is entitled to any voting rights or distributions associated with those securities. Since the securities received by the purchaser are not restricted or control securities, the purchaser enjoys the ability to transfer them freely in the secondary market whenever he or she chooses pursuant to Section 4(1) of the Securities Act. Simply put, the purchaser of the securities sold short is no different than any other investor who purchases securities in the secondary market.
The securities sold short typically come from the portfolio of unrestricted securities held by a financial institution. The lender of securities sold short does so willingly in return for appropriate compensation. Under standard industry practice, a lender of securities sold short usually receives the proceeds of the short sale as collateral for the loaned securities and will participate, either fully or partially depending on the identity of the investor to whom the securities were lent, in the investment income generated from the reinvestment of these proceeds. Importantly, this lender has the right to call back its securities at any time , thus creating substantial risk to the borrower. In addition, this lender will receive unrestricted securities--not restricted or control securities--when the loan is extinguished.
While the seller of securities sold short may decrease risk through the short sale, the seller continues to bear substantial risk in two ways. First, the seller retains the significant risk that the lender of the unrestricted securities sold short will call them back, either in whole or part, prior to the time the seller's restricted or control securities become tradeable under Rule 144. Contrary to the Commission's belief in this regard, this risk is real and substantial. Indeed, if the seller is unable to borrow additional shares from another party at that time, 16 the seller will have to purchase publicly traded securities in the open market and at current market prices because the seller is prohibited from delivering to the lender the seller's restricted or control securities under Rule 144. Second, if the current market price of the publicly traded securities rises, the short seller may have to put up cash or other securities to collateralize its short position as a result of a margin call, in the case of a non broker-dealer short seller, or a higher capital requirement, in the case of a broker-dealer short seller. This stems from the fact that the seller may not always be able to use its restricted securities as collateral for the short sale to the same extent that it would have been able to had the securities been unrestricted.
The issuer of the securities sold short is not adversely affected by the use of risk-reducing strategies. 17 The effect on the issuer is exactly the same as when ordinary course short sales in its securities occur. Such short sales relating to restricted or control stock must be made in compliance with the "uptick" rule. 18 In addition, participants in risk-reducing strategies have a significant incentive to ensure that short sales relating to restricted or control securities occur in sizes small enough to have only a marginal impact on the current market price of those securities. Indeed, material downward pressure on a security's market price resulting from the shorting of large blocks of that security would likely eliminate the reason behind engaging in a particular risk-reducing strategy in the first place.
Persons in the marketplace who own securities of the same class as those sold short receive significant benefits from hedging activities related to restricted or control security positions. These benefits stem from the moderating influence that these hedging activities have on potentially dramatic price swings associated with publicly traded securities of the same class as those being hedged. This moderating influence is demonstrated in two ways. First, hedging activities relating to restricted securities conducted during the Rule 144 holding period can help dampen the significant downward pressure on security prices that results when the holding period for a large block of restricted securities expires. Second, hedging activities relating to restricted and control securities can provide needed liquidity to the trading market of an illiquid security. These hedging activities can help prevent the price of that illiquid security from rising to levels not justified by its intrinsic value. As a result, the impact on holders of that security is mitigated when market sentiment turns against it.
E. Natural Limit on Ability to Hedge.
The ability of a holder of restricted or control securities to hedge his or her risk is largely dependent on the availability of unrestricted securities to sell short. The supply of unrestricted securities available to be lent in connection with short sales is finite. As a result, the only securities that can be effectively hedged are ones with the most liquid market and the smallest portion of existing restricted securities constituting the market capitalization of the issuer. Not infrequently, occasions arise when the holder of restricted or control securities desires to hedge his or her position, but the unrestricted securities needed to effect a given risk-reducing strategy are simply not available to the holder or a counterparty. Accordingly, supply limitations create a natural ceiling on the amount of hedging activity that can occur.
F. Practical Problems with the Commission's Approaches.
The Commission's approaches to regulating hedging activities in connection with Rule 144 (other than the status quo approach) all suffer to varying degrees from the same problem. Their implementation will wipe out all or part of the efficiency gains made possible through the use of risk-reducing strategies. As a result, illiquidity discounts will likely rise as the playing field between purchasers and issuers of unregistered securities becomes less level. In such event, the desirability of using private placements of securities as a means of capital formation will likely decrease, thus forcing many issuers to engage in the costly and time consuming registration process that they had sought to avoid by privately placing securities. In addition, the Commission's effort to shorten the holding period under Rule 144 to decrease illiquidity discounts will be countered by increased illiquidity discounts caused by a change in the current system for hedging.
Some would respond to this by arguing that the holder of restricted or control securities or a counterparty can simply register the securities involved in the hedge transaction. The problem with this argument is that risk-reducing strategies are primarily used by those without registration rights in the first place. Counterparties in particular who purchased restricted securities in a Section 4(1-1/2) transaction can only demand that the issuer register its newly-acquired shares if (a) the seller had demand or other registration rights in the first place and (b) those rights were assignable to the counterparty. In addition, it is unclear exactly how the prospectus delivery requirements could be met under a regulatory scheme that required registration of hedging transactions. The bottom line is that any regulatory framework covering these issues is likely to be complicated, costly, and difficult to comply with.
Even reinstating the Tolling Provision under Approach IV is problematic from a practical standpoint. In addition to the problems discussed above, additional risk will be associated with the determination of holding periods in a tacking context. Since short sales will not be prohibited under Approach IV and an unaffiliated holder is not required to give public notice of any short sales in which he or she engages, any other unaffiliated holder who purchases restricted securities from such holder pursuant to a Section 4(1-1/2) exemption has no way of positively knowing whether or not the seller's holding period has been tolled for any length of time due to a short sale or the use of any other risk-reducing strategy. While undoubtedly the purchaser would require a written representation from the seller that his or her holding period had not been tolled, ultimately the purchaser would bear the risk of engaging in a public distribution when he or she attempts to sell the securities pursuant to Rule 144 upon the expiration of the applicable holding period thereunder. This risk, of course, did not exist prior to 1990 because tacking by unaffiliated holders was not allowed.
Finally, the adoption of any of the proposed regulatory approaches (other than the status quo approach) would unnecessarily penalize the majority for the sins of a few. As stated earlier, the alleged abuses that the Commission has highlighted to date involve a limited number of market participants who purport to be complying with Regulation S. The Releases and Commission enforcement cases do not pertain to Rule 144. The alleged abuses under Regulation S typically involve payment failures, rather than hedging abuses. Since the same market participants that are abusing the system today will likely be the ones who attempt to abuse any newly-adopted regulatory system, Bear Stearns suggests that the Commission continue to administer the current system of regulation, rather than adopt a new system that penalizes market participants generally and results in harm to the capital markets through increased illiquidity discounts.
G. Company Registration.
Maintenance of the status quo is consistent with the implementation of the company registration system that has been recommended by the Advisory Committee on the Capital Formation and Regulatory Processes (the "Advisory Committee") chaired by Commissioner Steven M.H. Wallman. 19 This stems from the fact that, as noted above, an investor who purchases securities sold short in connection with a risk-reducing strategy does so based upon publicly available information concerning the issuer. In this respect, the purchaser of shares sold short is indistinguishable from any other secondary market purchaser of publicly traded shares of an issuer. Given the Advisory Committee's recommendation with respect to a company registration system, Bear Stearns requests that the Commission defer any action concerning risk-reducing strategies in Rule 144 and Regulation S contexts, other than the maintenance of the status quo, until the Commission takes final action with respect to a company registration system.
H. The "Fungibility" Doctrine Should Remain Dormant.
In the 1995 Release and the Rule 144 Release, the Commission sought comment on whether the fungibility doctrine should be reintroduced. For the reasons discussed below, Bear Stearns does not support its reintroduction.
As noted in a recent letter from the American Bar Association to the Commission, 20 the fungibility doctrine states that the holding period used in determining whether a purchaser acquired restricted securities with the requisite investment intent is "measured from the time of the most recent acquisition" 21 of securities of the same class. 22 This doctrine, however, proved highly problematic, 23 and the Wheat Report24 sponsored by the Commission examined the doctrine and ultimately rejected it. This report rightfully pointed out that "the present fungibility concept' bears little relationship to the needs of investors for disclosure" 25 and "introduces an additional element of uncertainty into an already clouded situation." 26 The Commission wisely followed the lead of the Wheat Report when it adopted Rule 144 in 1972, stating that "[f]or purposes of the rule, the doctrine of fungibility will not apply." 27
The notion that the use of a risk-reducing strategy could result in a de facto distribution in violation of Section 5 of the Securities Act rests upon the assumption that restricted securities and unrestricted securities are fungible. But by definition they are not. Restricted securities have different transferability and liquidity attributes and, hence, risk profiles than do unrestricted securities. Restricted securities cannot be transferred freely to the public until the holder thereof has complied with the provisions of Rule 144 or has the securities registered for resale. Therefore, such holder's securities are not liquid. The market clearly recognizes this and, accordingly, prices restricted and unrestricted securities of the same class differently.
This distinction between restricted and unrestricted securities is underscored when an investor either (a) holds both restricted securities and unrestricted securities of the same class or (b) acquires restricted securities of the same class at different times. When attempting to dispose of restricted securities pursuant to Rule 144, an investor in either situation must clearly identify the restricted securities being sold and be able to trace those shares back to the particular date on which he or she acquired them. 28 The burden, therefore, is on the seller of restricted securities to prove that the specific restricted securities being sold have been held in satisfaction of the applicable holding period under Rule 144. 29 The existence of this burden is sufficient to negate any need for the fungibility concept.
Bear Stearns believes that the status quo should be maintained because it preserves the efficiencies that risk-reducing strategies bring to the capital markets. Moreover, no concrete evidence has been set forth that establishes the existence of abusive hedging transactions under either Rule 144 or Regulation S that would support the imposition of a new, unnecessary, complicated, and expensive regulatory framework. Any such regulatory scheme would be based on the fungibility doctrine that the Commission itself discarded back in 1972.
The risk-reducing strategies used to hedge the risk associated with restricted and control securities do not result in any leakage of unregistered securities into the public trading market. Those strategies do not harm the purchaser or seller of securities sold short, the issuer of those securities, or the public trading market in general. Importantly, significant risk always remains with the holder of the restricted or control securities due to the ability of the lender of shares sold short to call them back. Finally, the finite number of securities that can be sold short already provides a natural protection against excessive hedging.
We trust that the Commission will find these comments helpful. The Commission may contact Joseph F. Danowsky, Esq., at (212) 272-2563, Kenneth A. Kopelman, Esq., at (212) 272-3627, or Jeffrey M. Lipman, Esq., at (212) 272-2559, of Bear Stearns to discuss further any aspect of these comments.
Very truly yours,
BEAR, STEARNS & CO. INC.
Name: Joseph F. Danowsky, Esq.
Title: Managing Director
|17 C.F.R. § 230.144 (1997).
|17 C.F.R. § 230.901-904 (1997).
|In a typical equity swap arrangement, a holder of restricted or control securities will swap with a counterparty the "all-in return" on his or her issuer common stock, consisting of the market appreciation or depreciation plus any dividends or other distributions, for an agreed-upon period in exchange for the return on an alternative, interest-bearing or better-diversified investment. The holder of restricted or control securities retains title to and the voting rights with respect to the issuer common stock during the swap term. In order to hedge its risk that the issuer common stock will decline in value during the swap term, the counterparty may engage in either short sales of shares of the same class as the swapped shares or in other hedging transactions. See Securities Act Release No. 33-7187 (June 27, 1995) (the "1995 Release"); Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Exchange Act Release No. 34514, [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶(Aug. 10, 1994); Warren Getler, Equity Swaps Now Require SEC Filing , Wall St. J., Sept. 28, 1994, at C1.
|In the typical hedged Section 4(1-1/2) purchase of restricted or control securities, an investor holding shares of restricted or control stock will sell his or her shares to a counterparty pursuant to a Section 4(1-1/2) exemption under the Securities Act. In order to hedge its risk that the stock will decline in value, the counterparty (who is now the record and beneficial owner of the restricted or control stock) usually sells short up to an equal number of shares of the same class. When the counterparty purchases shares of restricted stock, it will hold those shares until the expiration date of the applicable holding period under Rule 144. Shares of restricted stock are never used to cover the counterparty's short position, even when the Rule 144 restrictions on such shares are lifted. Instead, at the end of the restricted period the counterparty sells the restricted stock under Rule 144 and, in a separate transaction with an unrelated third party, buys stock on the open market to repay the stock loan.
|An investor who engages in a call option strategy seeks to enhance his or her yield on his or her restricted or control stock position by selling a cash-settled, European-style call option with a strike price at or above the current market price of publicly traded stock of the same class. An option relating to a restricted stock position will expire on or after the expiration of the applicable holding period under Rule 144. The investor receives the proceeds from the sale of the option and benefits in any appreciation in the market value of publicly traded stock of the same class up to the strike price of the option during the option's term. If at expiration the option expires in-the-money, the investor must pay the counterparty the difference between the current market price of the publicly traded stock upon expiration and the strike price; however, the investor retains the proceeds of the option and holds stock tradeable under Rule 144 at the current market price. If the option expires at-the-money or out-of-the-money, the investor's yield is enhanced because he or she keeps the proceeds from the sale of the option and holds securities tradeable under Rule 144 at the current market price. In order to hedge its risk during the term of the option, the counterparty may implement a dynamic hedging strategy using sophisticated computer models. This strategy may or may not require the shorting of unrestricted stock of the same class as the restricted or control stock.
|An investor who engages in a cash-settled put and call combination strategy seeks to protect the value of his or her restricted or control stock position from losses that would occur if the market price fell below a specified price that is less than the current market price of publicly traded stock of the same class while still participating in any appreciation in the stock price up to a specified price above such current market price of the stock. The investor implements this strategy typically by simultaneously (a) purchasing a cash-settled, European-style put option from a counterparty with a strike price below such current market price and (b) selling a cash-settled, European-style call option to that same counterparty with a strike price above such current market price. Often the call price and the put price are set at levels that will cause the premiums to be identical so as to cancel one another out, thus resulting in a "costless collar." Regardless of whether either option expires in-the-money, out-of-the-money, or at-the-money, the investor retains his or her ownership of stock tradeable under Rule 144 at the current market price of the stock upon expiration. In addition, if the call option expires in-the-money, the investor must pay the counterparty the difference between the current market price of the stock upon expiration and the strike price. If the put option expires in-the-money, the counterparty must pay the investor the difference between the strike price and the current market price of the stock upon expiration. Similar to a call option strategy, the counterparty may implement a dynamic hedging strategy using sophisticated computer models to hedge its risk during the term of the options. This strategy may or may not require the shorting of unrestricted stock of the same class as the restricted or control stock.
|For example, most of the abuses cited in connection with Regulation S in the 1995 Release and all of those that have been the subject of enforcement proceedings thereafter were primarily domestic transactions that only had a superficial and tenuous claim to offshore status.
These approaches are as follows:
Former Rule 144(d)(3) read as follows:
|Approaches I and II discussed supra note 8.
|See Bridget O'Brian, Help Abounds for Cash-Poor Yet Stock-Rich , Wall St. J., April 30, 1997, at C1.
|Control securities held by affiliates have never been subject to any holding period under Rule 144, since investment intent is not at issue with respect to control securities.
|See supra notes 3-6.
|Pursuant to Section 16(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), persons who are deemed "affiliates" of an issuer under Section 16 of the Exchange Act are prohibited from maintaining an open short position for more than 20 days with respect to securities that they own of that issuer.
|See Resales of Restricted and Other Securities, Securities Act Release No. 33-6099, Q.82 (Aug. 2, 1979).
|See infra Section E.
|See supra Section A.
|See 17 C.F.R. § 240.10a-1(a)(2).
|See Report of the Advisory Committee on the Capital Formation and Regulatory Processes, July 24, 1996, available on the Internet at the homepage of the Securities and Exchange Commission (http://www.sec.gov/news/studies/capform.htm).
|See Letter dated May 9, 1997 to the Commission from the Subcommittee on the 1933 Act-General of the Committee on Federal Regulation of Securities of the Section of Business Law of the American Bar Association.
|Roto Am. Corp., SEC No-Action Letter, [1970-1971 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶at 80,248 (Feb. 19, 1971).
The rationale behind the fungibility doctrine, according to the Staff, is as follows:
|See 7B J. William Hicks, Securities Law Series, Exempted Transactions Under the Securities Act of 1933 §(1994).
|Disclosure to Investors: A Reappraisal of Federal Administration Policies Under the '33 and '34 Acts (1969).
|Id. at 174.
|See Notice of Adoption of Rule 144, Securities Act Release No. 5223, [1971-1972 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,487 (Jan. 11 1972).
|See Resales of Restricted and Other Securities, Securities Act Release No. 33-6099, Q.21 (Aug. 2, 1979).
|While Rule 144 is not explicit as to how restricted securities acquired at various times are to be identified, the standard industry practice is to evidence specific restricted securities acquired on any particular date through a separately legended stock certificate, a general policing mechanism "strongly suggested" by the Commission in the private placement context. See Securities Act Release No. 5223, supra note 27; Use of Legends and Stop Transfer Instructions, Securities Act Release No. 5121, [1970-1971 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶(Dec. 30, 1970).