Rule 144: Ultimate Guide to Restricted Securities

Last Updated: 3/30/2021

Rule 144 of the Federal Securities Act relates to restricted securities. It stipulates that stock issued directly by an issuer or acquired by an insider is restricted unless exempted, registered, or safely harbored to be issued without legend.

Rule 144 allows traders to dispose of their shares in the public marketplace that is not registered with the Security Exchange Commission (SEC).

As the necessities for eliminating any prohibitive legend that shows up on restricted securities are profoundly technical, this article will guide you to understand the process of transacting with the securities.

What are Restricted Securities?

Rule 144 Summary

Restricted securities are shares, stocks, or any other security obtained in unregistered, private deals from an issuer or an individual referred to as the issuer’s partner. As a rule, an affiliate is an individual who can influence the issuer, such as an executive officer or a large shareholder.

The following is the rundown of basic restricted securities:

Private Placement: Securities obtained either directly or indirectly from the issuer or an affiliate of the issuer in a nonpublic exchange.

Accredited Investors or Compensatory Benefit: The Securities obtained from the issuer subject to the resale impediments of the Securities Act of 1933 (the “Protections Act”) Rule 502(d) or Rule 701(c).

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Restrictive Legends

A restrictive legend is a notification stamped on securities showing that the securities are limited to forestall unapproved transfers.

Under the Securities Act, issuers are needed to find a way to forestall dispersion to the general public of securities that are neither enlisted under the Securities Act nor absolved from such enrollment requirements.

Limitations on the exchange of enrolled securities may likewise be imposed by:

o The issuer’s articles of incorporation or bylaws; or

o An agreement between the issuer and the investor

Based on the issuer’s direction, a restrictive legend is put on physical stock endorsements or book-section accounts representing limited securities.

There are three fundamental sorts of restrictive legends:

Standard Legend (“33 Act” Legend)

The standard legend shows the securities have not been enlisted under the Securities Act and may not be exchanged in the commercial center except if they are enrolled under the Securities Act or are absolved from such enrollment.

Affiliate Legend

Affiliate legend shows a limitation set up with an affiliate who is in a position to impact the activities of an enterprise. An affiliate can be a director or a big investor).

Lockup Legend

Lockup legend demonstrates a legitimate agreement is set up that denies people from selling any portions of stock for a predefined timeframe.

The Process of Removing a Legend from a Restricted Security

The American Stock Transfer (AST) maintains and lifts the restrictions in compliance with SEC’s provisions. Here is the process of removing a legend from a restricted security:

Stock Certificate: Under this stage, the restrictive legend is put on physical stock authentication.

Documentation: Issuer audits all documentation and makes sure that the conditions in the rules and legend have been met.

Issuer’s counsel: Expulsion of legend will require legitimate sentiment from the issuer’s attorney


Transaction Approval

In this process, AST affirms or denies the transaction after an audit of documentation provided.

Prerequisites for Sale or Transfer of Restricted Securities

If you want to dispose of or move restricted or control securities, the rules and states of the legend and standard transfer necessities must be met.

Before the transaction is approved, the issuer’s attorney must audit the legend, legal opinion letter, and letter of instructions. It is only the issuer’s attorney who has the mandate to authorize the removal of legend.

Here is a rundown of the documents utilized in the transfer or sale:

Legal Opinion: Legal opinion letters are required for the evacuation of standard and affiliate restrictive legends. The opinion letter must fulfill the following conditions.

o Addressed to AST. Under certain restricted conditions, a letter approving dependence on an opinion conveyed to an outsider might be satisfactory.

o Written by an outside lawyer to the issuer, except if AST gets composed endorsement from an approved official of the issuer to acknowledge a lawful sentiment letter from the investor’s counsel.

o Dated no earlier than 90 days preceding restricted securities being presented to AST.

o Identify the securities that will be moved by giving the enrolled investor’s name, the authentication number or book-entry position, and the quantity of shares presented.

o State the lawful reason for removal of the legend

o No supposition of any realities, legal conclusions, or different issues essential to allow dependence upon the expressed securities law exclusion.

o It does not need AST to verify the event of any occasion or activity as a condition to the removal of the legend.

o Conclude that the shares are openly transferable and might be transferred without a prohibitive legend. The letter ought to likewise approve and train AST to move such offers without a prohibitive legend.

o Relate to a current transfer of shares.

If the quantity of shares being moved is not exactly the full number of securities, then point the assumption must contain directions whether the non-moved offers will stay subject to the prohibitive legend.

Blanket Legal Opinion: AST may acknowledge a blanket opinion letter to lift restrictions on numerous securities to be presented to AST after some time.

This blanket opinion must fulfill the following requirements.

o Include a listing of the enlisted holders, the declaration number or book-entry position and the quantity of shares represented.

o Must approve and educate AST to move the shares without a prohibitive legend upon introduction for the move of the shares secured by the opinion.

o Must express that AST is authorized to depend on the opinion until receipt by the issuer’s attorney’s written notice to the contrary.

The blanket opinion will lapse after one year and AST will demand a refreshed opinion by the issuer outside legal counsel.

Letter of Instruction: A letter of instruction is required for the removal of affiliate and lockup prohibitive legends. All letters of guidance must be affirmed by the issuer’s attorney before acknowledgment by AST and must incorporate the following:

o Signature of the issuer’s corporate secretary or another approved official

o The enlisted investor’s name, the declaration number or book-section position (as pertinent), and the number of shares represented.

The letter of instruction may not need AST to confirm the event of any occasion or activity as a condition to the expulsion of the legend.

Sale or Transfer of Restricted Securities

Expulsion of Restrictive Legend without Transfer

Securities are not viewed as confined if the necessities of Rule 144(b)(1) are met. At the point when this happens, protections might be sold or moved by the investor.

An investor can likewise demand to have the legend taken out, whether or not they need to move or sell shares. For this situation, AST must get an opinion letter from the issuer’s external attorney.

Non-Sales: Transferring Restricted Securities

In specific conditions, restricted securities might be moved yet at the same time require a prohibitive legend. For instance, an investor of limited securities may move them as a gift preceding the termination of the holding time frame (Rule 144(d)). When this occurs, the transferee will take the offers.

At the Point When a Restricted Security Will Be Rejected

The transfer of limited securities will be dismissed if AST doesn’t get the necessary documentation. In particular, if a specialist or an investor gives shares, yet doesn’t have the entirety of the required documentation, it will be dismissed.

Releasing Lockup Legends Prior To Expiration

To deal with lockup legends proficiently, the following records are required preceding termination:

o A legitimate conclusion letter from the issuer’s lawyer. If you don’t mind likewise audit the Lawful Opinion Letter segment for more data about what ought to be remembered for this letter.

o Excel spreadsheet demonstrating which limitations are being eliminated. An AST Relationship Manager will give the responsible organization or its legitimate guidance with an Excel spreadsheet posting all the restricted records.

The lawful assessment letter and Excel document ought to be gotten by AST’s Relationship Manager 48 hours before termination.

After the restriction(s) are lifted, the investor is then ready to have the offers moved out of the record through Direct Registration System (DRS) Profile.

Post Lockup Conversion Process

For the agent to have the option to move the shares through DRS Profile, the investor should give the intermediary their AST account data:

o Direct Registration Book-Entry Advice. When documents are stacked into the system, AST plays out a mailing that incorporates an explanation that gives investors their AST account number.

When the limitations are eliminated, and shares are qualified for transfer, a broker may require a duplicate of this announcement to move the shares to the investor’s brokerage account.

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