Quick Answer
A stock legend is a certificate notation that restricts transfer or resale, limiting the security's negotiability until the restriction is addressed. Restricted securities come from unregistered sales by an issuer or affiliate, while control securities are held by an affiliate. The resale safe harbor addresses certain sales of both types.
Restrictions matter before delivery because a certificate may be genuine and properly assigned yet still be unavailable for unrestricted resale.
Effect of a Stock Legend
- Stock legend: A notation on a security certificate stating that transfer or resale is subject to a restriction.
- Negotiability: A restrictive legend limits a certificate's ready transferability because the restriction must be addressed before unrestricted resale or delivery.
- Delivery requirements cover securities with restrictions, including delivery under government regulations and assignments or powers for registered securities.
Restrictive legend on certificate → restriction must be addressed → unrestricted resale or delivery can proceed
Restricted and Control Securities
| Type | How the security is identified |
|---|---|
| Restricted securities | Acquired in unregistered sales from an issuer or an affiliate of an issuer. |
| Control securities | Held by an affiliate of the issuer, regardless of how the affiliate acquired them. |
- The resale safe harbor for restricted and control securities is a non-exclusive safe harbor for certain sales, so the seller is not deemed an underwriter.
Exam Tip: Gotchas
- Restricted and control securities are not the same category. Restricted status comes from an unregistered sale by the issuer or an affiliate. Control status comes from the holder being an affiliate, regardless of acquisition method.
- A restrictive legend affects negotiability. It must be addressed before the certificate can be used for unrestricted resale or delivery.