Understanding the Process of Selling Restricted Stock

Rule 144 provides a legal way to sell restricted stock in the public market. By following what is commonly referred to as "Safe Harbor" laws, the law provides protection to sellers who adhere to the five main requirements:

Holding Period. Restricted securities must be fully paid for and beneficially owned for a period of at least one year prior to sale. There is no required holding period for control securities that are not also restricted securities. Therefore, a control person who acquires shares through exercise of stock options covered by a registration statement, or buys stock in the open market, has no Rule 144 holding period (although he or she may be subject to short swing liability if the shares are sold within six months of acquisition or date options are granted).

Current Information. The company whose securities are being sold under the rule must have available "adequate current public information." Generally, this requires meeting the reporting requirements of the Securities and Exchange Commission (SEC) for at least 90 days before the proposed sale and filing all required reports during the 12 months preceding the sale (or such shorter period that the company has been subject to filing requirements).

Volume Limits. The amount of securities that may be sold under Rule 144 during any three-month period is the greater of:

• 1 % of the class of securities outstanding, or
• The average weekly reported volume of trading in the securities during the four calendar weeks prior to the filing with the SEC of Form 144, Notice of Proposed Sale.

In calculating the maximum number of shares that may be sold, the seller must deduct the number of shares he or she has sold, as well as the number of shares sold within the prior three months by the following:

• Relatives who share the same household,
• Any trust or estate in which he or she owns or such relatives collectively own 10% or more of beneficial interest or serves as trustee, executor or similar capacity,
• Any corporation or entity in which he or she owns or such relatives collectively own 10% or more of the beneficial interests,
• A party to whom he or she donated or pledged any such shares as a gift or in pledge for a loan, and/or
• A party selling in concert with him or her.*

*Sellers acting in concert are treated as one in determining the number of shares that can be sold.

(Stocks quoted on the OTC Bulletin Board and Pink Sheets use only the 1% measure.)

Ordinary Brokerage Transactions. Rule 144 sales must be made in "brokers' transactions," that is, in agency transactions, although they may be effected in principal transactions if the broker is a market maker or a block positioner (only if the sale is of block size) in the issue. The broker can inquire only of customers and other dealers who have recently expressed buy interest in the issue. (However, if the dealer purchases the stock as principal, the dealer may solicit buy orders.)

SEC Filing. A completed original and two copies of SEC Form 144 (Notice of Proposed Sale) must be mailed to the SEC at or prior to the time of placing the sell order. If the security is exchange-traded, a copy must also be filed with the principal exchange.**

**A seller does not have to file a notice if within any 3-month period, he or she sells no more than 500 shares and the aggregate sales price does not exceed $10,000, however all other requirements of Rule 144 apply.

Intent to Sell. The seller of restricted or control securities must have a "bona fide intent to sell" the securities within a reasonable time after the filing of the notice with the SEC. SEC rules require the shares be sold within 90 days of filing form 144.

Exemptions from certain requirements 144(k). Restricted securities may be sold under Rule 144 exempt from volume limitations, filing and manner of sale requirements if the securities have been fully paid for and beneficially owned for at least two years and the seller has not been a control person for at least three months. Estates or beneficiaries of estates that are not control persons are exempt from volume limitations, the holding period and the manner of sale requirements. A legal opinion letter from Corporate counsel may be required for sale of these securities.

A FEW MORE THINGS TO CONSIDER

Rule 144 restrictions end after you've owned the restricted stock for two years provided that you haven't been an affiliate for at least three months. After the two-year point, you may sell the stock in the public market without further concern for the rule, although you still must have the legend removed first.

Click HERE to see Restricted Stock Flow Chart

Note: If you're a company affiliate, your stock is always considered control stock and is always subject to most of the Rule 144 restrictions. That's true no matter how you acquired it, or how much time has passed even if it's registered stock that you bought in the public market. (Click HERE for Definition of an Affiliate)

REMOVING A LEGEND

Restricted Stock is issued with Legend across the front of the certificate that denotes the stock is restricted (This is the reason Restricted Stock is also sometimes referred to as "legend stock." )

Even if you've satisfied Rule 144, you still can't resell restricted stock into the public market until you get the restrictive legend removed from the certificate by a transfer agent, the only authorized entity allowed to do so. The transfer agent is usually a specialized outside firm appointed by a company to maintain stock records. It issues and cancels certificates; deals with problems like lost, stolen or destroyed certificates; removes outdated legends; and handles other such chores.

Only a transfer agent can remove a restrictive legend. The transfer agent will require an opinion letter from the issuer's counsel or from his or her own lawyer plus 144 papers completed by a broker—stating that the restricted legend can be removed. Unless this happens, the transfer agent doesn't have the authority to remove the legend and you cannot execute the trade in the marketplace. If a dispute arises about whether a restricted legend can be removed, the SEC will not intervene. The removal of a legend is a matter solely in the discretion of the issuer of the securities. State law, not federal law, covers disputes about the removal of legends. Thus, the SEC will not take action in any decision or dispute about removing a restrictive legend. Since removing the legend can be a complicated process, if you're considering buying or selling a restricted security, it would be wise for you to consult an attorney who specializes in securities law.

Because of the paperwork required, the number of parties involved, and the logistics entailed, it takes some time to have the legend removed. The period varies but averages around three to four weeks. It usually depends largely on the transfer agent, the issuing company and the attorney who reviews the matter and writes the opinion letter.

General Steps

The broker confirms that the stock is in fact restricted by reviewing information you supply and then contacting the transfer agent or issuing company, if required. In any event you will probably have to complete the following steps, usually with the help of a broker;

Complete and submit SEC Form 144, as well as the Seller's Letter.

Determine your volume limitations;

Obtain legal and other needed approvals to have the legend removed;

Monitor the progress of each step until the new "cleaned up" certificate comes in;

Execute the trade and receive funds.

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