Reselling Non-Free Trading or Restricted Securities

Restricted Stock

People who buy stock in private placements under Regulation D not registered with the SEC, as well as any stock owned by a company’s officers, directors or affiliates, meaning control shareholders and shareholders owning more that 10% of a company’s stock, own “Non-Free Trading” or “Restricted Securities.” These kinds of securities can only be resold by persons who own them in certain limited ways.

This series of articles explores how people who buy stock in private placements under Regulation D not registered with the SEC can resell the stock they purchase in the private placement. These securities are called “Non-Free Trading” or “Restricted Securities.”

In addition to stock acquired in Reg. D Private Placements, any stock owned by a company’s officers, directors or affiliates, meaning control shareholders and shareholders owning more that 10% of a company’s stock, is also considered “Restricted Securities.”

How does a shareholder resell Restricted Securities?

Restricted Securities can be resold as free trading stock if registered Form S-1 in a Selling Stockholder Registration Statement, which is one form of a Go Public Direct transaction.

Most often, however, Restricted Securities are not registered for resale but instead are resold under an exemption provided in Section 4(1) of the 1933 Selling Stock Act for a resale transaction “by a person other than an issuer, underwriter, or dealer.” The issuer is your company. A dealer is a FINRA broker/dealer. What, then, is an underwriter?

An investment banking firm which arranges with an issuer for the public sale of its securities is clearly an “underwriter” under that section. However, individual investors who are not professionals in the securities business also may be “underwriters” if they act as links in a chain of transactions through which securities move from an issuer to the public.

Just as Regulation D explained what Section 4(2) meant, SEC Rule 144 explains what the term “underwriter” means and, more importantly, explains how both company investors and company insiders can resell Restricted Securities without being deemed and underwriter.

In the next three blogs we’ll explore:

  • Sale of Restricted Securities by Non-Insiders, just ordinary investors and shareholders
  • Sale of Restricted Securities by Insiders
  • Special Limitations on Resale of Restricted Securities if the Company is now or was ever in its past history a Shell Company: A company with no or nominal operations and no or nominal assets.

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