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Keith Sellers
University of North Alabama

Summary: Market Awaits Shortened 144 Holding Period

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By: Max Frumes | August 31, 2007

Proposed reductions in the holding periods for Reg 144 restricted securities will likely shrink pricing discounts significantly only on the most volatile and thinly traded issues.

A proposed change in regulations to shorten the holding period required before restricted stock can be resold to the public under Rule 144 is unlikely to drastically affect the discounts offered on shares issued in private placements, a new study found. ...

Yet a recent analysis by Pluris Valuation Advisors, a firm that specializes in valuing restricted securities, indicates that any decrease in discounts because of the reduced holding period will be small, and almost entirely limited to PIPEs issued by smaller companies with higher volatility. ...

Espen Robak, president of Pluris, said that because registration rights are mandatory in most PIPEs, holding periods are already usually less than a year.

"For most PIPEs, the expected holding period is substantially less than 360 days because so many of them are issued with registration rights," Robak said. "For the larger companies with lower volatilities, the new rule probably won’t have any effect at all, or at least a very modest effect because for people that invest in those PIPEs, they very rarely rely on Rule 144 to sell the stock. They’re going to assume the company is going to register the stock." ...

Robak too said he sees almost no impact on the high end of the market, while the smallest, riskiest segment of the market will still only see a change in the "low single digits."

"The discount is driven by more things than just the holding period," Robak said. "So when you keep all these other factors the same and you only reduce the holding period [by half], you’re not cutting the discount in half."

Pluris analyzed a sample of 120 equity PIPEs from the first half of 2007. The sample didn’t include Pink Sheet stocks and extremely thinly traded issues.

Robak said the larger, more stable PIPE issuers are more likely to register their shares early, which limits the impact of shortening the holding period, while investors in the smallest issuers are the ones that are more reliant on Rule 144. Pluris calculated current discounts at slightly less than 20% for the average equity PIPE. But the average discount was more than 40% for the smallest quintile of PIPE issuers.

Robak mentioned that the numerous other factors that affect the discount other than the holding period include the volatility of the stock, the size of the PIPE, the market cap of the issuer, revenues, total assets, per-share stock price, and in what market the stock trades.