Restricted stock
Also known as: unregistered stock, letter stock
Restricted stock is stock acquired in an unregistered transaction, such as a private placement, and therefore cannot be freely resold to the public. Rule 144 sets the holding period and conditions that must be met before it can be sold.
Restricted stock is unregistered stock. It comes to an investor through an exempt transaction — most commonly a private placement under Regulation D — rather than through a registered public offering. Because the shares were never registered with the SEC, they carry a legend restricting transfer and cannot simply be sold into the open market.
Rule 144 provides the path to selling. A non-affiliate must hold restricted shares for a minimum period (six months for a reporting issuer) before resale, and at the six-month mark that resale is still conditioned on adequate current public information about the issuer being available; only after a full year of holding may a non-affiliate resell free of Rule 144's conditions. Affiliates — officers, directors, and large shareholders — face additional ongoing conditions regardless of how the stock was acquired: they must file Form 144, sell through ordinary brokers' transactions, and observe a volume limit of the greater of 1% of the outstanding shares or the average weekly trading volume over the prior four weeks, measured over any 90-day period.
Stock held by an affiliate that was purchased in the open market is called control stock. Control stock is registered, so it has no holding period, but it is still subject to Rule 144's volume and filing requirements because of who owns it. The distinction is a favorite exam trap: restricted stock is defined by how it was acquired, control stock by who owns it.
The SIE, Series 7, Series 65, and Series 66 exams all test Rule 144. Expect questions asking you to compute the maximum number of shares an affiliate may sell, to identify which sales require a Form 144 filing, and to distinguish restricted stock from control stock.
Key takeaways
- Restricted stock is unregistered stock acquired in an exempt transaction such as a private placement.
- Rule 144 requires a six-month holding period for restricted stock of a reporting issuer before resale, and a non-affiliate selling at six months still needs current public information about the issuer; unrestricted resale comes at one year.
- Affiliates must also observe volume limits — the greater of 1% of outstanding shares or average weekly trading volume over the prior four weeks, per 90 days — and file Form 144.
- Control stock is registered stock held by an affiliate; it has no holding period but remains subject to Rule 144 volume limits.