STOCK RESTRICTIONS AND LEGEND REMOVALS

wHAT ARE THE DIFFERENT RESTRICTIONS ON SHARES AND WHY DO SHARES NEED TO BE REGISTERED IN ORDER TO remove RESTRICTIONS?

 
ClearTrust explains how shares can become free-trading in the marketplace.

REGISTERED VS. UNREGISTERED STOCK

Registered stock is a security that has been listed in a registration statement filed with and declared effective by the Securities and Exchange Commission (SEC). The SEC requires securities to be registered or meet an exemption to registration before it is sold on the open market.

According to the SEC, registration under the Securities Act of 1933 has two objectives:

  • To require that investors receive financial and other significant information concerning securities being offered for public sale in order to make informed judgments about whether to purchase a company's securities.

  • To prohibit deceit, misrepresentations, and other fraud in the sale of securities.


RESTRICTIONS

Securities can be issued as unregistered (restricted) through private sales from the issuer. The resale of unregistered shares must qualify under an exemption to registration or safe harbor. By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.

  1. Standard Restriction:

 

A standard restriction is placed on your stock if it is unregistered by the SEC. Some examples of this include private placement offerings, subscription agreement, venture capital deals, employee stock benefit plans, and compensation for professional services.

2. Control person or affiliate:

 

If a shareholder is considered an insider, control person, or an affiliate of an issuer, most exemptions require more extensive requirements to meet in order to sell the shares in the free-trading market

3. Lock Up and leak out Agreements:

 

WHAT IS THE DIFFERENCE BETWEEN A “LOCK UP” AND A “LEAK OUT”?

lock-up agreement is a legally binding contract between the underwriters and insiders of a company prohibiting these investors from selling any shares of stock for a specified period of time.

Leak Out Period is the time frame in which a shareholder has volume trading limitations placed on selling restricted stock. A leak out is over and above that which is prescribed for affiliates selling under Rule 144.

 
ClearTrust offers insight to issuers for leveraging legends to create clarity and help ensure lock up/leak out agreements are enforced.

4. REGULATION S

 

What Is Regulation S?

Regulation S is a safe harbor for US companies that want to sell their stock to foreign investors. Some key stipulations are that the securities must be sold in an offshore transaction without any direct selling efforts in the US stock market. Notably, shares offered for sale offshore under Regulation S are still considered restricted securities in the US even after resale.

To learn more about Regulation S, check out the SEC’s Regulation S webpage.

*Have specific questions about restricted stock? Visit the Restricted Stock section of our FAQ page.


LEGEND REMOVALS

registrations AND EXEMPTIONS:

IN ORDER TO REMOVE A RESTRICTION (LEGEND) ON SHARES, THE SHAREHOLDER MUST FILE UNDER A REGISTRATION OR AN EXEMPTION. BELOW ARE COMMONLY USED REGISTRATIONS AND EXEMPTIONS.

 

What is a Registration?

A Registration Statement is a filing that an Issuer can submit to the SEC to register shares that are being offered to the investing public.

There are several types of registrations.

The most common are S-1, S-3, and Regulation A.

The SEC reviews each registration and may request amendments to be made to the filing. When the registration is approved by the SEC, the shares listed are eligible to be resold by the shareholders. You may click here to review an issuer’s filings with the SEC.

*Please note Registrations can go stale. We recommend you contact the issuer to confirm if the registration is still valid.

 
  1. rule 144 resale exemption

What is Rule 144?

Rule 144 is the most popular safe harbor that allows shareholders to sell unregistered stock in the public marketplace.

If your shares have not been registered with the SEC, then you can rely on an exemption from registration. Rule 144 is the most common exemption used to remove the restriction from unregistered shares. This rule has a holding period requirement as well as several other requirements. A securities attorney will opine on whether the requirements of the Rule have been met.

A common misunderstanding about Rule 144 is that once a tacking period has been met, Rule 144 allows shares to simply become “free trading.”  There is no such thing as  “free trading” shares under Rule 144. The Rule is a transactional exemption that allows shares to be sold in the public once certain conditions are met. The process of removing the restrictive legend from a stock certificate is done only to facilitate a public resale, and in no way alleviates an investor from complying with all aspects of Rule 144 at all times.

 
 

*For removing the legend for a non-affiliate, keeping the shares in the same name and moving into your own brokerage account


 
 

*For removing the legend for a non-affiliate to immediately transfer the shares to a different registration name


 
 

*For affiliates removing the legend under Rule 144.

 
Caution: This chart assumes that the issuer has either never been a shell or, if so, has complied with Rule 144(i)(2).

Affiliate or person selling on behalf of an affiliate

Non-Affiliate
(and has not been an affiliate during the prior three months)

Restricted Securities of
Reporting Issuer

During six month holding period – no resales under Rule 144 permitted.
After six month holding period – may resell in accordance with all Rule 144 requirements including:

 

  • Current public information,
  • Volume limitations,
  • Manner of sale requirements for equity securities &
  • Filing of Form 144
During six month holding period – no resales under Rule 144 permitted.After six month holding period but before one year – unlimited public resales under Rule 144 except that the current public information requirement still applies.
After one year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

Restricted Securities of
Non-Reporting Issuer

During one year holding period – no resales under Rule 144 permitted.
After one year holding period – may resell in accordance with all Rule 144 requirements including:

 

  • Current public information,
  • Volume limitations,
  • Manner of sale requirements for equity securities &
  • Filing of Form 144
During one year holding period – no resales under Rule 144 permitted.
After one year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

To learn more about Rule 144, check out the SEC’s published information and the complete rule.


 

2. rEGULATION A+ registration

What is a Reg A+ Offering?

Regulation A provides an exemption from registration for public offerings. 

Two Different Tiers:

Tier 1- Up to $20 million in a 12-month period

Tier 2- Up to $50 million in a 12-month period.

Requirements:

There are certain basic requirements applicable to both Tier 1 and Tier 2 offerings, including company eligibility requirements, bad actor disqualification provisions, and disclosures. Additional requirements apply to Tier 2 offerings, including limitations on the amount of money a non-accredited investor may invest in a Tier 2 offering, requirements for audited financial statements and the filing of ongoing reports. Issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators.

To learn more about registering under the Reg A, check out the SEC’s Compliance Guide for Reg A.


 

3. s-1 registration

What is a Form S-1?

SEC Form S-1 is a registration type under the Securities Act of 1933 for new securities.

Companies may file a Form S-1 for their initial public offering (IPO). A few of the requirements for this filing include providing the plans for use of capital, details of the current business model and a prospectus.


*These are not the only types of registrations an exemptions available to unrestrict shares. If you plan to unrestrict shares using one not listed above, please send us a legal opinion from counsel with which registration or exemption you are filing under to inquire what else will be needed for your request.