Restricted Securities - Explained
Restrictions on Vesting and the Ability to Transfer
Written by Jason Gordon
Updated at April 6th, 2023
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What 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.
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?
Related Topics
- Securities Law (Intro)
- What are Securities Laws?
- What is a Security?
- What qualifies as an Investment contract?
- What are the primary federal securities laws?
- What are the regulatory goals of security laws?
- What is the Securities and Exchange Commission?
- What is an Initial Public Offering?
- What is a Direct Public Offering?
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- Securities Act of 1933
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- Who are the parties regulated in an offer to sell securities?
- What are the primary disclosure documents required in an offer to sell securities?
- Forward Looking
- Red Herring Prospectus (Securities) Definition
- Registration of Securities
- What is an issuer allowed to do at each stage of the registration process?
- How are issuers classified for purposes of the registration and offering process?
- What is an issuer allowed to do during the Pre-filing Period?
- What are the limitations on the issuer during the Post-filing, Waiting Period?
- What is an issuer allowed to do during the Post-Effective Period?
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- Section 3(a)?
- Section 3(b)?
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- Section 4(a)(5)?
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- Rule 144a
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- Liability Under the Securities and Exchange Act of 1933
- What is civil liability under Section 11 of the 33 Act?
- What is civil liability under Section 12 of the 33 Act?
- What are defenses available to charges under Sections 11 and 12?
- What is civil liability under Section 17 of the 33 Act?
- What is potential criminal liability under the 33 Act?
- The Security Exchange Act of 1934
- When must an issuer register pursuant to the 34 Act?
- What disclosures are required of reporting companies under the 34 Act?
- What is liability under Section 10(b) and Rule 10(b)(5)?
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- What damages are available under Section 10 and Rule 10(b)(5)?
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- What is liability under Section 16 of the 34 Act?
- What is liability under Section 18 of the 34 Act?
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- Liability under the Securities Enforcement Remedies Act?
- Blue Sky Laws State Securities Laws
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- When is an issuer required to comply with state securities laws?
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