Lower Marketability Discounts In The Offing (As the SEC Shortens Rule 144 Holding Period)?

Restricted (Rule 144) stock studies form the basis for the marketability discounts that have become a standard part of almost every estate & gift tax valuation. But when the SEC makes changes to Rule 144, those changes will impact the discounts taken in restricted stock transactions -- even though the Rule changes are not applicable to FLPs, LLCs, family-owned businesses, and so on. 

The SEC has just (last Thursday) adopted one of the most radical changes to Rule 144 in decades. Not only has the holding period been cut in half, but the dribble-out provisions have been eliminated for all non-affiliates after the new 6-month holding period. The new rules will lead to significantly lower marketability discounts. 

However, most analysts would agree that the marketability of restricted stock should not affect marketability discounts for private entities, such as FLPs or LLCs.  But we know that Courts favor more recent data.  And the IRS is always looking for a reason to reduce discounts. 

Understanding the proposed changes and their impact on the restricted stock market is the first, best step to understanding how this data needs to be adjusted when determining marketability discounts for closely held family-owned entities. 

These changes are addressed in, "New Rule 144: Lower Illiquidity Discounts and Another Boost for the PIPE Market?" which appears in the November/December issue of Valuation Strategies. To read an excerpt of the article, or to request a reprint, just click here.