Restricted stock is stock that has been sold privately by the issuing company or by an affiliate of the issuing company. If you have purchased a private placement of stock from a company, or if you have purchased shares from a private individual who qualifies as an affiliate of the company, you probably have restricted stock. Usually, there is a stamped legal warning, called a legend, on the certificate, but not all certificates representing restricted stock carry this stamped legend.
The legend states that the stock represented by the certificate has not been registered under the Securities Act of 1933 and are Restricted Securities as the term is defined in Rule 144 of that Act. This means that the securities legally require a written release, in the form of an opinion letter, either from the issuer or the attorney for the issuer, before the legend may be removed and clean certificates issued. Restricted securities cannot be sold except under special circumstances, so the removal of the legend is important if you want to sell your shares.
There are three participants in the removal of a legend from restricted stock: the issuing company, the company's attorney and the transfer agent. If there is no written release or attorney's letter from the issuer or its attorney accompanying the presentation of the certificates to the transfer agent, the legend will not be removed. If the transfer agent refuses to remove the legend, unless they are registered with the SEC or are exempt from the registration requirements, and that exemption requires an opinion letter from the attorney.
There are two kinds of restricted securities: those issued through a private placement and control securities, which are securities held by a controlling stockholder, executive or director of the company - also known as affiliates of the company. Certificates representing control shares often have no legend stamped on them because their restriction starts when the shares are sold by the affiliated person to an outside investor. Until your shares have been held for the appropriate period of time, according to the restriction, neither the issuer, the attorney nor the transfer agent will remove the legend.
Removal of Legend
The SEC states "The removal of a legend is a matter solely in the discretion of the issuer of the securities. State law, not federal law, covers disputes about the removal of legends." The SEC does not rule on whether the legend may be removed. While it is unlikely that the issuer and attorney will refuse to issue a written release if you have met the holding requirements, and further unlikely that the transfer agent will refuse to honor the written release, if this does happen the next step for you is to seek legal council experienced in Rule 144 stock matters.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.