Restriction Removal

Restriction Removal

Restricted shares carry a legend that limits how they can be sold. This page explains what restricted stock is, how shares become eligible for resale, and what WCST needs to remove a restrictive legend.

What is restricted stock?

Restricted stock is acquired in an unregistered offering, such as a private placement from the issuing company, or in a resale from an affiliate of the company. The certificate or book-entry position generally carries a restrictive legend stating that the shares cannot be sold unless the resale is covered by an effective registration statement, generally on Form S-1, or does not require registration.

SAMPLE RESTRICTIVE LEGEND
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY OTHER SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR OTHERWISE DISPOSED EXCEPT (I) UPON EFFECTIVE REGISTRATION OF THE SECURITIES UNDER THE ACT AND OTHER APPLICABLE SECURITIES LAWS COVERING SUCH SECURITIES, OR (II) UPON ACCEPTANCE BY THE COMPANY OF AN OPINION OF COUNSEL IN SUCH FORM AND BY SUCH COUNSEL, OR OTHER DOCUMENTATION, AS IS SATISFACTORY TO COUNSEL FOR THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.

What does registered mean?

Every offer and sale of securities must be registered with the SEC unless an exemption applies. That includes all sales, including the sale in which you acquired your restricted shares.

Registration under the Securities Act (the “truth in securities” law) requires the company to disclose important business and financial information in a registration statement filed on the SEC’s EDGAR system, so investors can make informed decisions. Common resale registration statements are Form S-1 and Form S-3.

If your resale is not covered by an effective registration statement, it may qualify for an exemption from registration. A legal opinion from a securities attorney is needed to support the exemption.

Removing a legend does not register your shares. The shares may become eligible for resale under an effective registration statement or an exemption, but they remain restricted securities because of how they were acquired.
You may not need to remove the legend before selling. If you are selling through your brokerage account, ask your broker how it wants the restricted shares presented. Some companies also require their approval before a legend is removed; we will let you know if yours does.

Rule 144

The most common exemption for selling restricted shares.

Section 4(a)(1) of the Securities Act exempts transactions by anyone other than an issuer, underwriter or dealer. Rule 144 is a safe harbor for that exemption. Whether you can rely on it depends on your affiliate status with the company, whether the company files reports with the SEC, and how long you have held the shares.

Registration statements

Selling under a resale (selling stockholder) registration statement.

A resale registration statement filed with the SEC allows the listed shareholders to sell their restricted shares. Any shares that are not sold are reissued in the shareholder’s name with the restrictive legend.

If your shares are included in an effective registration statement, WCST removes the legend when we receive:

  • 1. The original stock certificateWith your transfer instructions.
  • 2. A Medallion Signature Guarantee ›On the certificate or on an accompanying stock power.
  • 3. A representation letter from the executing brokerConfirming the shares were sold in compliance with the prospectus delivery requirements. The letter should give the SEC file number of the prospectus or include a copy of it.
West Coast Stock Transfer, Inc.
721 N. Vulcan Ave., Ste. 106, Encinitas, CA 92024
(619) 664-4780  |  cs@wcsti.com