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SEC Issues Guidance on Tacking of Rule 144 Holding Period in Up-C Structure

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The staff of the Division of Corporation Finance of the Securities and Exchange Commission recently issued an interpretive letter that clarified that the holding period under Rule 144(d) under the Securities Act of 1933 (the “Securities Act”) for shares of common stock in an “Up-C” received in exchange for privately placed units (“OP Units”) of the Up-C’s operating partnership (“OP”) commences upon acquisition of the OP Units. This conclusion should provide significant additional flexibility to holders of OP Units seeking liquidity in an Up-C structure, as well as potentially making the Up-C structure more attractive to issuers and targets that seek to use such structure to achieve tax efficiencies in M&A transactions. The letter, which we refer to herein as the Up-C letter, is captioned Rule 144(d)(1) Up-C Structure and is available here.

The staff’s position in the Up-C letter is consistent with analogous guidance issued earlier this year in the context of a similar structure referred to as an Up-REIT. This position will permit many holders that satisfy the Rule 144(d) holding period with respect to their OP Units to resell the shares of common stock of the Up-C immediately following an exchange under Rule 144. However, sales by affiliates of the Up-C will still be subject to the volume and manner of sale limitations under Rule 144.

The parties submitting the no-action request did not identify specific parties or transactions to which the SEC staff should direct its interpretive letter. As a result, the Up-C letter represents an interpretive position which any holder of Up-C shares received in exchange for OP Units can rely. While the Up-C letter specifically focused on OP Units received in connection with pre-IPO formation transactions, we have had informal discussions with the staff of the SEC during which they confirmed that the guidance in the Up-C letter would similarly apply in other situations (like an M&A transaction) where the Up-C structure may be employed by an already public corporation that was not an Up-C at the time of its IPO or in which a currently public Up-C could use its OP Units as a tax-efficient form of acquisition consideration.

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.