Quick Answer
Restricted securities come from private placements and need a 6-month holding period for reporting companies, or 12 months for non-reporting companies, before resale. Control securities are held by affiliates, whose status depends on control rather than an ownership threshold. Affiliates face volume limits and Form 144 filing thresholds. Qualified institutional buyers have a separate resale safe harbor.
All the equity securities we've covered so far can generally be bought and sold freely on public markets. But some shares come with restrictions on when and how they can be sold. The restricted-stock resale rule governs these sales.
Two Categories of Restricted Sales
Think of it this way: "Restricted" is about how the shares were acquired (private placement, not on the open market). "Control" is about who owns them (insiders with influence over the company). Different reason, same result: extra rules before you can sell.
Restricted Securities
- Acquired through private placements (Regulation D (Reg D)), employee compensation plans, or other unregistered transactions
- Cannot be freely sold in the public market without registration or an exemption
- Must satisfy a holding period before selling under the restricted-stock resale rule
Holding periods:
| Company Type | Minimum Holding Period |
|---|---|
| SEC reporting company | 6 months |
| Non-reporting company | 12 months |
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
- Restricted stock comes from private placements, NOT open market purchases. If shares were bought on an exchange, they are not restricted.
- Holding period is 6 months for reporting companies, 12 months for non-reporting. The shorter period applies when the SEC already has up-to-date public filings on the issuer.
Control Securities
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.
- Owned by affiliates: people who directly or indirectly control, are controlled by, or are under common control with the issuer. Control means the power to direct management and policies through voting shares, contract, or otherwise. Officers, directors, and 10%+ shareholders are common examples, but no fixed ownership percentage decides affiliate status
- Subject to volume limitations regardless of how the shares were acquired (even if purchased on the open market)
- Volume limit: The greater of:
- 1% of outstanding shares, OR
- Average weekly trading volume over the preceding 4 weeks
- The cap applies to shares sold in any rolling 3-month period
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 any 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
- Affiliates have to release shares gradually rather than dump them all at once
Exam Tip: Gotchas
- A small stake and no officer or director title do not rule out affiliate status. The test is the control relationship, which can arise through contractual or voting rights.
- Affiliate status is company-specific. A CEO's position at Apple does not make her an affiliate of Microsoft. If she buys Microsoft shares on the open market and has no control relationship with Microsoft, she is treated as any ordinary investor for those shares: no volume limit, no manner-of-sale requirement, no Form 144.
- Affiliates face volume limits on ALL shares of their own company, not just restricted ones. Even shares purchased on the open market are subject to volume restrictions.
Safe-Harbor Requirements
What "safe harbor" means: a safe harbor is legal protection you earn by meeting a rule's conditions: meet every requirement and the resale is protected (allowed without registering the sale), miss even one and the protection falls away. The same idea appears elsewhere on the exam, such as the privacy protection firms receive for anti-money-laundering information sharing.
When an affiliate or holder of restricted stock wants to sell, the restricted-stock resale rule provides a safe harbor if these conditions are met:
| Requirement | Detail |
|---|---|
| Current public information | Required for affiliates; also required for non-affiliates selling reporting-company restricted shares after 6 months but before 12 months |
| Holding period | 6 months (reporting) or 12 months (non-reporting) for restricted stock |
| Volume limitations | Greater of 1% of outstanding shares or average 4-week trading volume |
| Ordinary brokerage transaction | Broker executes the sale as agent at normal commissions, with no active solicitation of buyers. Selling directly to a market maker is also permitted. A sale with active solicitation is a distribution and requires Securities Act registration. |
| Form 144 filing | Required if sale exceeds 5,000 shares or $50,000 in a 3-month period |
Exam Tip: Gotchas
- Form 144 threshold: 5,000 shares OR $50,000 in 3 months. Either trigger alone is enough to require the filing.
Affiliates vs. Non-Affiliates
This is one of the most tested distinctions on the SIE:
To use the non-affiliate conditions, the seller must not be an affiliate at sale or during the preceding three months. This lookback is separate from the restricted-stock holding period. Giving up control today does not immediately qualify a former affiliate for the lighter conditions below.
| Condition | Affiliates | Non-Affiliates |
|---|---|---|
| Volume limits | Always apply | None (after holding period) |
| Manner of sale (equity) | Required: broker as agent or directly to a market maker | Not required (after holding period) |
| Form 144 filing | Required (if threshold met) | Not required (after holding period) |
| Holding period (restricted stock) | 6 or 12 months | 6 or 12 months |
| Holding period (unrestricted stock) | None (but volume, manner-of-sale, and Form 144 still apply) | None, and no restrictions at all |
| Current public information | Required | Required for reporting-company restricted stock from 6 to 12 months held; not required after 12 months |
Exam Tip: Gotchas
- Affiliates ALWAYS have volume, manner-of-sale, and filing restrictions when selling equity, even for shares they bought on the open market. The only thing that goes away for open-market purchases is the holding period.
- Non-affiliates who have held restricted stock for 6+ months (reporting company) or 12+ months (non-reporting) have no volume limits, manner restrictions, or Form 144 filing requirements. For reporting-company shares held for 6 to 12 months, current public information must still be available. After 12 months, a non-affiliate can sell without any resale safe-harbor conditions.
Reselling to Qualified Institutional Buyers
Everything above is about selling restricted stock into the public market, where the holding period, volume limits, manner-of-sale, and Form 144 conditions apply. There is a separate route that skips all of them: Rule 144A, the private-resale rule for qualified institutional buyers (QIBs).
- A QIB is a large institution that owns and invests at least $100 million in securities
- A holder may resell restricted securities to a QIB without registration, with no holding period, no volume limit, and no Form 144
- The shares stay restricted in the QIB's hands. The QIB cannot turn around and sell them freely to the public
- This route gives large institutions a way to trade restricted securities among themselves. The Securities Offerings unit covers it in more detail
Exam Tip: Gotchas
- The QIB private-resale route has no holding period and no volume limit. The buyer just has to be a qualified institutional buyer with at least $100 million in securities.
- Selling to a QIB does not lift the restriction. The securities stay restricted; only the seller's registration burden goes away.
- Rule 144 and Rule 144A are different routes. Rule 144 is the public-market resale safe harbor with the holding period and volume limits; Rule 144A allows resales only to QIBs, not to accredited investors or other buyers.
What Should You Check on Exam Day?
- Can you explain the difference between restricted securities and control securities?
- Do you know the holding period for a reporting company versus a non-reporting company?
- Can you state who qualifies as an affiliate under the restricted-stock resale rule?
- Do you know the two thresholds that trigger a Form 144 filing requirement?
- Can you explain why selling restricted securities to a qualified institutional buyer skips the holding period and volume limit, but the shares stay restricted?