Restricted Stock and Resale Restrictions

Now that you understand shareholder rights, the next question is: can you actually sell your shares whenever you want? Not always. Some securities come with restrictions on when and how they can be resold.

What Is Restricted Stock?

Restricted stock refers to securities acquired through:

• Private placements (Regulation D offerings)
• Employee compensation plans (stock grants, options exercises)
• Other unregistered transactions

These shares are not registered with the SEC, which means they cannot be freely traded on the open market. The SEC imposes holding periods and resale conditions to protect public investors.

Think of it this way: Registration is the SEC's way of making sure public investors get full disclosure before buying. If you got your shares without that disclosure process (through a private deal or as compensation), you cannot just turn around and dump them on the public market. You have to wait and follow specific rules first.

SEC Rule 144: Resale of Restricted and Control Securities

Rule 144 is the primary rule governing how restricted and control securities can be sold in the public market.

Key Definitions

• Restricted securities: Shares acquired in unregistered transactions (private placements, compensation plans)
• Control securities: Shares held by affiliates (insiders: officers, directors, or anyone owning 10%+ of the company), regardless of how they were acquired
• Affiliates: People in a position to influence or control the company

Holding Period Requirements

• The holding period begins when the securities are fully paid for
• After the holding period, non-affiliates of reporting companies can sell freely with no volume limits or filing requirements
• Affiliates must continue to follow volume limits and filing requirements even after the holding period

Volume Limitations (Affiliates Only)

Affiliates are limited in how many shares they can sell in any 3-month period. The limit is the greater of:

• 1% of outstanding shares of the same class, OR
• Average weekly trading volume over the prior 4 weeks

Non-affiliates are not subject to volume limitations once the holding period is satisfied.

Form 144 Filing Requirement

Affiliates must file Form 144 with the SEC if selling:

• More than 5,000 shares, OR
• More than $50,000 in value

The form must be filed at the time the sell order is placed.

Exam Tip: Gotchas

• Two holding periods: 6 months for reporting issuers, 12 months for non-reporting issuers.
• Volume limit is the GREATER of 1% of outstanding shares or average weekly trading volume (not the lesser).
• Affiliates never escape volume limits and filing requirements, even after the holding period. Non-affiliates can sell freely once the holding period is met.

SEC Rule 144A: Institutional Resale

Rule 144A provides a separate pathway for reselling restricted securities, but only to large institutional investors.

• Allows resale of restricted securities to Qualified Institutional Buyers (QIBs) without SEC registration
• A QIB must own and invest at least $100 million in securities of unaffiliated issuers (the threshold is $10 million for broker-dealers)
• No holding period required under Rule 144A
• Greatly increases liquidity in the institutional market for unregistered securities
• Securities sold under Rule 144A cannot be of the same class as securities listed on a national exchange

Exam Tip: Gotchas

• Rule 144 has a holding period; Rule 144A does not. This is a common source of confusion.
• QIB threshold is $100 million in securities (not $1 million or $25 million). For broker-dealers, the threshold is $10 million.