Restricted Stock and Resale Restrictions
Restricted and control securities cannot be freely traded in the public market. Securities and Exchange Commission (SEC) Rule 144 governs when and how these securities can be resold.
Restricted Stock
- 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
- Subject to holding periods and volume limitations
Control Securities
- Definition: Shares held by affiliates (officers, directors, or shareholders owning 10%+ of outstanding shares)
- Even if the shares are registered, they are still subject to Rule 144 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 restricted because of who holds it (an affiliate). Either way, Rule 144 governs the resale.
Exam Tip: Gotchas
- Control securities are restricted because of who holds them, not how they were acquired. Even registered shares become restricted when held by an affiliate.
SEC Rule 144: Resale of Restricted and Control Securities
Rule 144 is the primary mechanism for selling restricted and control securities into the public market.
Holding Period Requirements
| Issuer Type | Minimum Holding Period |
|---|---|
| SEC-reporting company | 6 months |
| Non-reporting company | 12 months (1 year) |
- Holding period begins when securities are bought and fully paid for
- Holding period applies only to restricted securities (not to control securities that were acquired in the open market)
Exam Tip: Gotchas
- Reporting company holding period is 6 months; non-reporting is 1 year. The shorter period applies to companies that file regular reports with the SEC.
Volume Limitations (Affiliates/Insiders Only)
In any 3-month period, an affiliate cannot sell more than the greater of:
- 1% of outstanding shares, OR
- Average weekly trading volume over the prior 4 weeks
Exam Tip: Gotchas
- Volume limitations apply to affiliates regardless of how long they have held the shares. Affiliates are never fully free from Rule 144 restrictions.
Form 144 Filing
- Affiliates must file Form 144 with the SEC if proposed sales within a 3-month period exceed 5,000 shares or $50,000
- Filed at the time the sell order is placed
- Non-affiliates are not required to file Form 144
Insider Reporting Forms (Forms 3, 4, and 5)
- Form 3: Initial statement of beneficial ownership filed when an insider (director, officer, or 10%+ shareholder) first becomes a reporting insider
- Form 4: Reports any change in beneficial ownership and must be filed within 2 business days of the transaction; assume this 2-business-day deadline for the exam
- Form 5: Annual catch-all filing for certain exempt transactions not required on Form 4
Exam Tip: Gotchas
- Form 4 is about timing, not size. Even a single share trade triggers the 2-business-day filing requirement for insiders. Volume thresholds apply to Form 144, not Form 4.
Rule 144 Summary Table
| Requirement | Affiliate (restricted stock) | Affiliate (control stock) | Non-Affiliate (restricted, reporting co.) | Non-Affiliate (restricted, non-reporting co.) |
|---|---|---|---|---|
| Holding period | 6 months (reporting) / 12 months (non-reporting) | None | 6 months | 12 months |
| Volume limits | Yes | Yes | No (after holding period) | No (after holding period) |
| Form 144 filing | Yes (if > 5,000 shares or $50,000) | Yes (if > 5,000 shares or $50,000) | No | No |
| Manner of sale | Ordinary brokerage transactions | Ordinary brokerage transactions | No restriction | No restriction |
| Current public info | Required | Required | Required (6-12 months); not required after 12 months | Required (first 12 months); not required after 12 months |
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.