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 - officers, directors, or shareholders who own 10% or more of outstanding shares
- 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
- Affiliates = officers, directors, or 10%+ shareholders. The exam expects you to know who counts as an affiliate.
- Affiliate status is company-specific. A CEO of Apple is an affiliate of Apple only. If she buys Microsoft shares on the open market, she is treated as any ordinary investor for those shares: no volume limit, no manner-of-sale requirement, no Form 144. The resale rule's affiliate restrictions apply only when selling shares of the company she actually controls.
- 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 | Adequate information about the company must be publicly available |
| 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:
| 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 |
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) can sell freely with NO volume limits, manner restrictions, or filing requirements.