What is restricted stock?
Restricted stock certificates are securities acquired in a unregistered, private placements or offerings from the issuing company or resales from an affiliate of the issuing company. These securities generally bear a restrictive legend stating that the shares cannot be sold unless the resale transaction is covered under an effective registration statement, generally on Form S-1, or the resale transaction does not require registration. Sample language of a restricted legend is below in red.
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?
All offer and sales of securities must be registered with the SEC unless an exemption can be evidenced. It is important to note that this means all sales, including the sale which led to the restricted shares that you acquired. Your resale transaction needs to be a part of an effective registration statement filed on SEC’s EDGAR system. Registration under the Securities Act, referred to as the “truth in securities” laws, requires that issuing companies disclose important business and financial information in the form of a registration statement. This registration statement is intended to assist the public with making investment decisions by disclosing material information about the issuing company. Common resale registration types are Form S-1 or S-3.
If your resale transaction is not part of an effective registration statement, you may be able to qualify for an exemption to the registration requirements. A legal opinion from a securities attorney to evidence any claimed exemption to registration is needed. The most common exemption, referred to as Rule 144, involves transactions for a person other than the issuer, underwriter, or dealer.
Important:
Removing a restricted legend does not register your shares or end the restricted status. The shares may be eligible for resale by way of an effective registration statement or exemption transaction, but they are still restricted because the manner in which they were acquired.
Important:
You do not need to remove the restricted legend from your certificate to resale the shares through your brokerage account. The preference for presenting the restricted certificate should be made by the Broker/Dealer accepting the shares.
Rule 144
Section 4(a)1 under the Securities Act, often referred to as the “ordinary trading” exemption, provides the most commonly used exemption for holders to sell restricted securities. Rule 144 provides a safe harbor for this exemption. To take advantage of this exemption, certain conditions must be met based on factors including your affiliate status with the issuer, the reporting status of the issuer, and the length of time you have owned the stock.
➜ Learn More: SEC Article
➜ Learn More: 17 CFR 230.144
Registration Statements
Registration statements filed with the SEC allow shareholders to remove restricted legends allowing the sale of restricted stock. These registration statements are referred to as selling registration statements, provided that any unsold shares be issued back into the shareholders name with a restriction.
If your shares are included in an effective registration statement, we will remove the restricted legend upon receipt of the following items.
1. The original stock certificate with transfer instructions.
2. The stock certificate or an accompanying stock power must contain a medallion signature guaranteed stamp.
3. A representation letter from the executing brokerage firm confirming that the shares have been sold pursuant to the prospectus delivery requirements. The letter should identify the SEC file number for the prospectus or be accompanied with a copy of the prospectus.