Quick Answer
Restricted securities come from unregistered transactions and always carry a holding period; control securities are held by affiliates regardless of how they were acquired, and only carry a holding period if they are also restricted. Affiliates face volume limits and a Form 144 filing above certain thresholds even on control stock bought in the open market.
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: Shares held by affiliates (officers, directors, or shareholders owning 10%+ of outstanding shares)
- 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 restricted because of who holds it (an affiliate). Either way, the SEC's restricted-stock resale rule 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.
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.
How Long Must You Hold Restricted Securities Before Selling?
| 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)
Why 6 months vs. 12 months?
- Reporting companies file regular 10-K, 10-Q, and 8-K reports with the SEC, so the market already has fresh public information about the issuer
- Non-reporting companies do not, so the market needs more time to develop reliable information about the security on its own
- Rule of thumb: the more public disclosure already on file, the shorter the required holding period
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.
How Much Can an Affiliate Sell in a 3-Month Period?
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
What is the volume limit, and who is it on?
- The cap is on the affiliate selling, not on the buyer or the firm. It limits how many shares the affiliate may sell over the rolling 3-month window
- The "greater of" formula 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 3-month 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.
When Must an Affiliate File Form 144?
- 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
What Do Forms 3, 4, and 5 Report?
- 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.
How Do the Rules Compare Across Seller Types?
| 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 | Not required (the only condition is the holding period) |
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 reporting companies, 12 months for non-reporting companies.
- Apply volume limits and Form 144 only to affiliates; non-affiliates past their holding period sell with no cap or filing.
- Keep the two insider-reporting rules separate: Form 144 is about dollar/share size, Form 4 is about timing (2 business days), regardless of size.