Most investors are familiar with publicly traded stock that is bought and sold on an exchange through a brokerage account. Shares of restricted stock are less familiar -- you normally acquire these from stock benefit plans at work or through a private purchase from the issuer. You cannot sell restricted stock without first removing the restrictive legend stamped on the back of the stock certificates.
Stock might be restricted for one or more reasons. Through a procedure known as a private placement, a corporation might issue restricted shares that it hasn’t registered with the Securities and Exchange Commission. You might receive restricted shares from your employer, perhaps through an employee stock benefit plan or compensation agreement. If you receive stock from a company “affiliate” -- an executive officer, director or large investor -- the shares are restricted “control securities.” Under SEC Rule 144, you can lift stock restrictions by holding the shares for a set amount of time.
Rule 144 is a “safe harbor” regulation -- if you meet its conditions, you can legally sell restricted securities in the public market . Rule 144 establishes a holding period for restricted securities, extending from the date of receipt -- through purchase or gift -- or from the date you exercise an employee stock option. The holding period is six months for shares that normally trade publicly or one year for shares that don’t. Control shares also require a one-year holding period. Once the holding period expires, you can start the process of having the shares reissued without the restrictive legend.
Removing the Legend
The legend stamped on the back of restricted stock warns against public resale of the shares. You will need to have the issuer replace these shares with legend-free ones. Start by contacting the shareholder relations department of the issuing corporation to find out the proper procedure. The corporation will send you a letter authorizing its transfer agent to remove the legend. Send the stock certificates to the issuer’s transfer agent, along with the authorization letter and a payment for the service. You can sell the shares you receive back from the transfer agent in the marketplace, without restriction. Control shares usually do not have legends on the back -- to sell these, you might have to fill out SEC Form 144.
Rule 144 has additional conditions for the sale of control shares by affiliates. These include the public disclosure of current information about the issuer, the use of a normal brokerage transaction to sell the shares without attempting to attract buyers, and filing SEC Form 144 for stock exceeding 5,000 shares or $50,000 in value sold within a three-month period. The SEC limits the number of shares an affiliate can sell in a three-month period to the greater of 1 percent of the outstanding shares or the stock’s average weekly trading volume over the four weeks preceding the date of filing Form 144.
A new holding period begins for each batch of restricted shares you receive. If you receive restricted shares from a non-affiliate, tack on the seller's holding period to your own. If an affiliate gives you control shares as a gift, the holding period begins when the affiliate acquired the shares rather than the gift date. Rule 144 is not the only available method to lift stock restrictions. For example, if the shares you receive are restricted because the issuer hasn’t registered them with the SEC, a subsequent registration allows you to sell the shares immediately, independent of the holding period.
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