Restricted Securities 101

Posted on June 5, 2013 by securities-lawyer-101

The Securities Act of 1933, as amended (the Securities Act) does not require that issuers place restrictiv e legends (Restrictive Legends) on certificates representing restricted securities. It has become routine for public companies and private companies seeking to go public to place Restrictive Legends on the certificates representing their Restricted Securities not covered by a registration statement under the Securities Act. It is also a routine matter for an issuers transfer agent to require that Restrictive Legends be prominently placed on stock certificates representing restricted securities. Restrictive Legends provide notice to shareholders as well as to third parties that the securities represented by the stock certificate are not covered by an effective registration statement under the Securites Act and cannot be resold unless registered or an exemption from registration is available. Where do restricted shares come from? Most restricted securities are issued in connection with exempt offerings such as those made in reliance upon Rule 504, 505 and 506 of Regulation D. Restricted Securites are also securities held by an issuers control persons. A typical Restrictive Legend looks something like this: The Securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state of the United States or in any other jurisdiction. The Securities represented hereby may not be offered, sold or transferred in the absence of an effective registration statement for the Securities under applicable securities laws unless offered, sold or transferred pursuant to an available exemption from the registration requirements of those laws.

When restricted securities become eligible for resale under Rule 144, shareholders often seek to remove the Restrictive Legend from their stock certificates and deposit their shares with their stockbroker. Issuers frequently ask their securities lawyers if the Restrictive Legend on a stock certificate can be removed once Rule 144 has become available. In SEC Release No. 33-8869, the SEC stated with respect to restricted securities that it did not object if issuers remove Restrictive Legends from securities held by non-affiliates after all of the applicable conditions in Rule 144 are satisfied. The SEC acknowledged that the decision of whether to remove a Restrictive Legend is a matter solely in the discretion of the issuer of the securities, and that disputes about the removal of legends are governed by state law or contractual agreements, rather than federal law. Holding Period for Restricted Securities Issuers should be cautious about removing Restrictive Legends from stock certificates representing restricted securities after only six months for SEC reporting issuers unless a prior or specific sale is contemplated. In order for the reduced six month holding period to be applicable to a particular resale, the SEC Reporting Company must have been subject to the SECs reporting requirements for a period of at least 90 days. Additionally, the issuer must have filed all SEC reports required during the preceding 12 months or such shorter period that they were required to file. If the issuer becomes delinquent in its SEC Reporting obligations, Rule 144 is unavailable or if the issuer does not have current public information available at the time of the sale, the Rule 144 holding period is increased to one year. Securities lawyer, Brenda Hamilton provides legal advice to private companies and public companies in securities matters including SEC registration, Rule 144 resales and going public transactions.