What is Restricted Stock?
Restricted Stock is stock that has not been registered with the Securities and Exchange Commission (SEC) and is acquired from the issuing corporation or from a control person (also known as an affiliate of the issuer). Typically, restricted stock will have been acquired in one of the following ways:
When a company goes through the process of an Initial Public Offering (IPO), the original owners, who gave up a percentage of their shares of stock in order to raise capital from public investors will, after the offering, own Restricted Stock. The shares sold to the public (or “registered shares”) are not considered “Restricted” and are freely tradable.
This occurs when a purchaser buys the stock directly from the original owner, whose shares are Restricted. The restrictions carry over, although certain holding period restrictions may be “tacked on” by the purchaser.
These are transactions in which the security has been acquired directly from the issuing corporation by the buyer in a negotiated transaction.
Mergers and Acquisitions
When company decides to merge or acquire another company, the vehicle of barter or payment in many cases is Restricted Stock. (A typical example is when an acquiring company issues unregistered stock to the owners of a target company as an inducement to accept the takeover.
Stock Options or Stock Purchase Plans
In many cases public companies will issue stock options or stock purchase plans to key employees, or others deemed important to the company. Under certain conditions the options offered may be for restricted stock of the company, and therefore, once exercised, would require registration prior to sale.
What is Rule 144(k) Stock?
Rule 144(k) stock is Restricted Stock that has been: (i) held at least three years, and (ii) the owner is not and has not been an affiliate of the issuer for three months preceding the sale.
What is Control Stock?
Control Stock is stock that is owned by persons who control the business affairs of the issuing corporation. In most cases, corporate directors and senior officers are considered control persons. Also, under certain conditions, close relatives, related trusts, estates, corporations, and partnerships may be considered control persons. (The terms “affiliate” and “insider” are used interchangeably with control persons).
In determining who is a control person, the SEC presumes anyone owning 10% or more of the outstanding shares of a corporation, whether he or she is a trustee or executor, or an officer or director, is usually considered a control person. Such a presumption may be rebutted by facts which establish that the person is not in a control position or part of a control group.