Court Reminds SEC That Rule 144 Is A Non-Exclusive Safe Harbor

Just over five years ago, Barry Epling went to breakfast with two of his business colleagues.  At the breakfast, he discussed his relationship with Hemp, Inc., explaining that he and his long-time friend and business advisor, Bruce Perlowing, "run Hemp, Inc."  Despite this protestation of control, Mr. Epling said that he avoided any official title because, among other reasons, "if you're an officer or director or if you're a controller in the company, you're what is called an affiliate. And if you're an affiliate, you can sell one—an amount of stock equal to 1% of the issued shares of that classic [sic, probably "class of"] stock every 90 days."  Unfortunately for Mr. Epling, his prandial remarks were being recorded.

The Securities and Exchange Commission ended up charging Mr. Epling and others with violating the registration requirements of Section 5 of the Securities Act.  The SEC's argument was straightforward: Mr. Epling admitted that he controlled Hemp, Inc. and that made him an affiliate subject to Rule 144's volume limitations.  Relying on this analysis, the SEC sought partial summary judgment.

U.S. District Court Judge Jennifer A. Dorsey, however, didn't see the SEC's case as "open and shut", noting that 

"[F]alling outside the Rule 144 safe harbor does not automatically make someone an underwriter.  An individual who fails to satisfy Rule 144 may still not be an underwriter after a fact-intensive analysis—an analysis that is inappropriate at the summary-judgment stage.  Plus, Epling vigorously denies the veracity of the statements that he made to his ex-business partners.

SEC v. Hemp, Inc., 2018 U.S. Dist. LEXIS 38396.  The SEC, of course, knows this already because Rule 144 itself states: 

"Rule 144 is not an exclusive safe harbor.  A person who does not meet all of the applicable conditions of Rule 144 still may claim any other available exemption under the Act for the sale of the securities."

The SEC didn't achieve an early victory, but it may still ultimately prevail.  If the SEC succeeds in getting the taped conversation introduced, a jury may decide that Mr. Epling was telling the truth at breakfast and that his later sworn testimony abjuring his earlier statements is false.

Tags: Rule 144