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"Restricted" Securities: Removing the Restrictive Legend

Jan. 16, 2013

"Restricted" securities are securities acquired in an unregistered, private sale from the issuing company or from an affiliate of the issuer. They typically bear a “restrictive” legend clearly stating that you may not resell them in the public marketplace unless the sale is exempt from the SEC’s registration requirements.

Rule 144 under the Securities Act of 1933 provides the most commonly used exemption for holders to sell restricted securities. To take advantage of this rule, you must meet several conditions, including a six-month or one-year holding period.

Even if you’ve met all the conditions of Rule 144, you still cannot sell your restricted securities to the public until you’ve had the legend removed from the certificate. Only a transfer agent can remove a restrictive legend. But the transfer agent won’t remove the legend unless the issuer consents—usually in the form of an opinion letter from the issuer’s counsel to the transfer agent.

If you want to remove the restrictive legend, you should contact the company that issued the securities—or the transfer agent for the company’s securities—to ask about the procedures for removing a legend. If you have a broker, you may want to ask your broker to help you.

If a dispute arises about whether a restrictive legend can be removed, the SEC will not normally intervene. The removal of a legend is a matter solely in the discretion of the issuer. State law, not federal law, covers disputes about the removal of legends.

If you are considering acquiring restricted securities, it would be wise for you to consult an attorney who specializes in securities law. To learn more about the conditions you would have to meet to publicly sell your restricted securities, read our overview, Rule 144: Selling Restricted and Control Securities. You can also read our publications on Rule 144 and Form 144, which you may need to file with the SEC if you sell restricted securities.

We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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