Restricted Securities - Explained
Restrictions on Vesting and the Ability to Transfer
Written by Jason Gordon
Updated at September 25th, 2021
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Table of Contents
What are restricted securities?What are Holder Restrictions? What are Transactional Restrictions? Discussion QuestionPractice QuestionAcademic ResearchWhat are restricted securities?
Restricted securities, as the name implies, are subject to restrictions on when they can be sold or transferred following their issuance. Rule 144 of the 33 Act lays out the rules for restricted securities. It is also used to refer to securities that are subject to a vesting period.
Next Article: Section 3(a) Registration Exemption Back to: SECURITIES LAW
What are Holder Restrictions?
Restricted securities in public companies are those held by officers, directors, or major shareholders (10% of total shares). These individuals cannot sell a number of shares greater than 1) the average weekly trading volume for the shares during the prior 4 weeks of trading, or 2) a quantity equal to 1% of total shares outstanding.
What are Transactional Restrictions?
Securities issued pursuant to a transactional exemption are also restricted from immediate resale. Regulation D exemptions prohibit resale for 12 months following the date of the issuance. This is to make certain that an exemption is not used as a straw transaction to transfer shares to individuals who could not otherwise be investors under the applicable exemption.
Related Topics
- Registration Exemptions Securities Act of 1933
- What are Exempt Securities and Exempt Transactions?
- What are Restricted Securities?
- Section 3(a)?
- Section 3(b)?
- What is a Rule 147 Exemption?
- What is a Section 4(a) Exemption?
- Section 4(a)(5)?
- What is a Regulation A Exemption?
- What are Regulation D Exemptions?
- What is a Rule 504 Exemption?
- What is a Rule 505 Exemption?
- What is a Rule 506(b) Exemption?
- What is a Rule 506(c) Exemption?
- What is Rule 502(d) and the Rule 144 Safe Harbor?
- Rule 144a
- What are the disclosure requirements for companies employing an exemption?
- What is the requirement to file Form D?
- What is the effect of failing to register an offering under Section 5?
Discussion Question
Why do you think the securities laws restrict the ability of certain insiders from selling a specific quantity of their shares? Is this fair to those shareholders? Why or why not? Why do you think the securities laws limit the transfer of shares issued in an exempted transaction?
Practice Question
Robert is a large shareholder and COO of ABC Corp, a publicly traded corporation. He acquired many of his shares when he joined ABC Corp, immediately prior to the company going public. He received the shares in an exempted transaction that did not require registration of the securities. He now believes that ABC Corp has plateaued in its share price and he wants to sell a large quantity of his shares on the open market. What limitations might Robert face in selling the shares?