Quick Answer
A stock legend restricts transfer or resale and limits negotiability until the restriction is addressed. The restricted securities definition includes securities acquired directly or indirectly from an issuer or affiliate in a transaction or chain of transactions not involving any public offering. Control securities are held by an affiliate, and 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.
How Does a Stock Legend Affect Negotiability?
- 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.
Restrictive legend on certificate → restriction must be addressed → unrestricted resale or delivery can proceed
Is the Security Restricted, a Control Security, or Both?
| Type | How the security is identified |
|---|---|
| Restricted securities | One included category covers securities acquired directly or indirectly from an issuer or affiliate in a transaction or chain of transactions not involving any public offering. |
| 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 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. One included restricted-securities category covers securities acquired directly or indirectly from an issuer or affiliate in a transaction or chain of transactions not involving any public offering. 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.
What Should You Check on Exam Day?
- Treat a restrictive legend as a limit on ready transfer or resale.
- Identify one restricted-securities category from direct or indirect acquisition from an issuer or affiliate in a transaction or chain of transactions not involving any public offering.
- Identify control status from the holder's affiliate relationship.
- Remember that one security can be both restricted and a control security.