Restricted Stock and Resale Restrictions

The rule applies differently depending on whether the restriction comes from how the shares were acquired or from who holds them, so the two categories are worth separating before working through the resale mechanics.

What Makes a Security "Restricted"?

• Restricted securities = shares acquired through unregistered transactions (private placements, Reg D offerings, employee compensation plans, seed capital)
• Cannot be freely traded in the public market
• Always subject to a holding period; volume limitations apply only if the holder is also an affiliate (control securities, below)

What Makes a Security a "Control" Security?

A note on terminology: The SEC's standard term is "control securities" (no -ed). The word "control" describes the holder's relationship with the issuer, not a past-participle adjective.

• Definition: An affiliate is a person who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the issuer. Control securities are the shares held by that affiliate
• Officer or director status, or owning 10%+ of outstanding shares, is common evidence of control, but the rule's test is functional control, not an automatic ownership trigger
• Even if the shares are registered, they are still subject to the resale rule's restrictions
• The restriction follows the person, not the security

Think of it this way: Restricted stock is restricted because of what it is (unregistered). Control stock is subject to resale conditions because of who holds it (an affiliate). Either way, the SEC's restricted-stock resale rule governs the resale.

• "Restricted" is a defined term. It means shares acquired in an unregistered transaction. Registered shares an affiliate buys on the open market are control securities, not restricted securities.
• The two labels can overlap. Shares an affiliate receives in a private placement are both restricted and control, so both sets of conditions apply.

Exam Tip: Gotchas

• Control securities are subject to resale conditions because of who holds them, not how they were acquired. Registered shares an affiliate buys on the open market are control securities, not restricted securities. They carry volume limits, manner-of-sale rules, and Form 144 above the thresholds, but no holding period.

How Do You Sell Restricted and Control Securities Under the Resale Rule?

The SEC's restricted-stock resale rule is the primary mechanism for selling restricted and control securities into the public market.

Do Restricted Securities Have a Holding Period Before Sale?

• Restricted securities must be held for a minimum period before they can be resold into the public market
• The holding period begins when the securities are bought and fully paid for
• The holding period applies only to restricted securities, not to control securities that were acquired in the open market
• Reporting companies file regular reports with the SEC, so the market already has fresh public information about the issuer; a non-reporting company does not, so its securities carry a longer holding period
• The minimum holding period depends on the issuer:

Is There a Limit on How Much an Affiliate Can Sell?

• An affiliate cannot sell an unlimited number of shares at once; the resale rule caps how much an affiliate may sell over a rolling period
• The cap is on the affiliate selling, not on the buyer or the firm
• The limit prevents two things at once:
  • A sudden flood of insider shares from crashing the market price and signaling insider distress
  • Insiders from effectively running their own unregistered public distribution, sidestepping the disclosures registration would require
• An affiliate who needs to sell more than the cap allows must wait for the window to refresh, or use a registered offering instead

Exam Tip: Gotchas

• Volume limitations apply to affiliates regardless of how long they have held the shares. Affiliates are never fully free from the resale rule's restrictions.

Must an Affiliate File Form 144?

• Affiliates must file Form 144 with the SEC when their proposed sales exceed certain thresholds
• Filed at the time the sell order is placed
• Non-affiliates are not required to file Form 144

How Do the Rules Compare Across Seller Types?

The non-affiliate route requires that the seller is not an affiliate at sale and has not been an affiliate during the preceding three months. This lookback is separate from the securities' holding period: giving up control does not immediately remove the affiliate resale conditions.

Exam Tip: Gotchas

• Affiliates always face restrictions (volume limits, Form 144, and manner-of-sale requirements) even for shares purchased on the open market (control stock).
• Non-affiliates who satisfy the holding period can sell freely with no volume limits or filings.

What Should You Check on Exam Day?

• Identify whether the restriction comes from the security (unregistered) or the holder (affiliate status); the answer changes which rules apply.
• Match the holding period to the issuer type: 6 months for a reporting company's restricted securities, 1 year for a non-reporting company's.
• Apply volume limits and Form 144 only to affiliates; non-affiliates past their holding period sell with no cap or filing.