Restricted SharesRestricted Shares - This term refers to the shares of common stock of a company that are restricted pursuant to Rule 144 of the U.S. Securities Act of 1933, as amended. Shareholders that hold restricted shares must find an exemption from the registration provisions of the SEC in order to sell them without violating the federal securities regulations. What Makes the Shares Restricted? Unless the shares have been registered pursuant to a registration statement filed with the SEC and that registration statement is still current and effective, generally speaking, the following shareholders are considered “affiliates” of the issuing company (also known as the “issuer”)will have restricted shares: - officers; Additionally, investors or shareholders that received common stock through a private placement offering , such as a Regulation D offering, or are issued shares as part of an employee stock benefit plan, or as compensation for professional services, will be holding restricted securities. If there is a person or entity that has such control, power or persuasion over a company that they are deemed to be a “control person,” then there shares would also be considered restricted. Why are the Shares Restricted by Definition? The reasoning behind the restriction is that the SEC feels it would be better for such persons or entities to have some sort of restriction over the ability to simply sell shares into the public marketplace whenever they wanted to. It is to provide a more level playing field to other shareholders who might not have access to all the information the other shareholders listed above would have as a result of their position with the company. Restricted Legend on the Certificate? If you acquire restricted common stock, the share certificate you receive should be stamped with a "restricted legend”. The legend will indicate that the shares may not be resold in the public marketplace unless the shares are registered with the SEC or they are exempt from the registration requirements. Here is a typical restricted legend: THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE Joseph LaRocco, Esq. has represented public and private companies, helped clients with funding transactions and advised them on public listings on various exchanges in the United States, Europe and Australia. He has also advised clients on numerous corporate and securities matters including capital raising, SEC regulations and corporate finance through the use of private placement funding.
What Conditions Apply to Restricted Shares? In order to sell restricted shares to the public, you must follow the applicable conditions set forth in Rule 144. The rule is not the exclusive means for selling restricted shares but provides a "safe harbor" exemption to selling shareholders. The rule's five conditions are summarized below: 1. Holding Period. Before selling any restricted shares in the marketplace, there is a holding period. If the company that issued the shares is subject to the reporting requirements of the Securities Exchange Act of 1934, then you must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year. The holding period begins on the date that you paid the consideration for those shares. The holding period only applies to restricted shares. Shares that were acquired in the public market are not restricted and there is no holding period for an affiliate who purchases shares of an issuer in the public market, however, other requirements of Rule 144 apply to the number of shares and time periods during which an affiliate's shares may be resold. If you need more information here are some additional links You may want to consider. For more information on Rule 144 you can visit the SEC’s webpage on restricted shares. Here is the Wikipedia Link. Here is some good information from About.com. Here is a fairly short definition from VC Experts. |
Joseph LaRocco often assists management teams in analyzing various funding options which they may not have realized were available to them. In addition to advising private and public companies, Joseph LaRocco also advises investors and helps structure transactions using various funding structures such as asset based loans and private placements. Mr. LaRocco is a graduate of Southwestern University School of Law and Pace University.