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When you acquire restricted securities or hold control securities, you must find an exemption from the SEC’s registration requirements to sell them in the marketplace. Rule 144 allows public resale of restricted and control securities if a number of conditions are met. This post provides general information about what you need to know about selling your restricted or control securities. It also describes how to have a restrictive legend removed. Please keep in mind that this information is being provided for educational purposes only. Thus, it should not be relied upon as legal advice. If you have any questions concerning this post, you should contact a qualified professional.What are Restricted and Control Securities?
Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing “seed money” or startup capital to the company. Rule 144(a)(3) identifies what sales produce restricted securities.
Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as a director or large shareholder, in a relationship of control with the issuer. Control means the power to direct the management and policies of the company in question, whether through the ownership of voting securities, by contract, or otherwise. If you buy securities from a controlling person or “affiliate,” you take restricted securities, even if they were not restricted in the affiliate’s hands.
If you acquire restricted securities, you almost always will receive a certificate stamped with a “restricted” legend. The legend indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from the registration requirements. The certificates of control securities are usually not stamped with a legend.What are the Conditions of Rule 144?
If you want to sell your restricted or control securities to the public, you can follow the applicable conditions set forth in Rule 144. The rule is not the exclusive means for selling restricted or control securities, but provides a “safe harbor” exemption to sellers. The rule’s five conditions are summarized below:
Additional securities purchased from the issuer do not affect the holding period of previously purchased securities of the same class. If you purchased restricted securities from another non-affiliate, you can tack on that non-affiliate’s holding period to your holding period. For gifts made by an affiliate, the holding period begins when the affiliate acquired the securities and not on the date of the gift. In the case of a stock option, such as one an employee receives, the holding period begins as of the date the option is exercised and not the date it is granted.
If you are not (and have not been for at least three months) an affiliate of the company issuing the securities and have held the restricted securities for at least one year, you can sell the securities without regard to the above conditions. If the issuer of the securities is subject to the Exchange Act reporting requirements and you have held the securities for at least six months but less than one year, you may sell the securities as long as you satisfy the current public information condition.Can the Securities be Sold Publicly if the Conditions of Rule 144 Have Been Met?
Even if you have met the conditions of Rule 144, you can’t sell your restricted securities to the public until you’ve gotten the legend removed from the certificate. Only a transfer agent can remove a restrictive legend. But the transfer agent won’t remove the legend unless you’ve obtained the consent of the issuer — usually in the form of an opinion letter from the issuer’s counsel — that the restricted legend can be removed. Unless this happens, the transfer agent doesn’t have the authority to remove the legend and execute the trade in the marketplace.
To begin the process, an investor should contact the company that issued the securities, or the transfer agent of the company’s securities, to ask about the procedures for removing a legend. Since removing the legend can be a complicated process, if you’re considering buying or selling a restricted security, it would be wise for you to consult an attorney who specializes in securities law.What if a Dispute Arises Over Whether I Can Remove the Legend?
If a dispute arises about whether a restricted legend can be removed, the SEC will not intervene. The removal of a legend is a matter solely in the discretion of the issuer of the securities. State law, not federal law, covers disputes about the removal of legends. Thus, the SEC will not take action in any decision or dispute about removing a restrictive legend.