The Securities and Exchange Commission is currently considering changes to Rule 144 that would cut the required holding periods for restricted stock in half, from one year to six months, for non-affiliates. Proposed at the end of May, the changes could ease the efforts by microcap companies to raise capital and, among other consequences, have profound effects on financing structures and costs for PIPEs (Private Investments in Public Equity).
How might the proposed rule changes affect calculation of discounts for lack of marketability (DLOM)? For starters, the ongoing controversy regarding Rule 415 (lengthening the time to “effective” registrations) might ease somewhat, as more investors rely on Rule 144, says Espen Robak, CFA (Pluris Valuation Advisors), authors of the Liquistat™ database (See BVWire #56-2). Average private placement discounts might also be reduced slightly.
“However, keep in mind that the Liquistat data suggest that discounts are a concave function of the holding period, meaning that the increment to the discount from six to twelve months is much less than [that] from zero to six months,” he adds. “Given this—and the significant number of private placements with registration rights, I would expect the reduction in average discounts would be moderate.” The SEC’s Proposed Modernization of Smaller Company Capital—Raising and Disclosure Requirements is available here.
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