Securities Law, NYSE, NASDAQ & OTC Markets Listings & Compliance

Restricted Stock Q&A — 2025 Edition

Prepared by Hamilton & Associates Law Group, P.A.
www.securitieslawyer101.com

Introduction

Restricted and control securities are common in private placements, employee compensation, and merger transactions. Although these shares are “restricted” at issuance, they may later become eligible for resale under Rule 144 or other exemptions if specific conditions are met.

This Q&A explains the principal rules, SEC guidance, and common questions regarding the resale of restricted and control stock, including the impact of shell-company status, affiliate restrictions, and reporting obligations.

Q1: What are restricted securities?

Restricted securities are shares acquired in unregistered, private transactions, such as private placements under Regulation D, Regulation S, or Section 4(a)(2) of the Securities Act.

These securities carry a restrictive legend and cannot be sold publicly unless the holder complies with Rule 144, registers the shares, or relies on another resale exemption.

Q2: Who is an “affiliate” or “control person”?

An affiliate is a person who directly or indirectly controls, is controlled by, or is under common control with the issuer.

This category typically includes officers, directors, and significant shareholders (usually those owning 10% or more of the company’s shares). Affiliates continue to face resale limitations under Rule 144 even after holding periods have expired.

Q3: What is Rule 144, and why is it important?

Rule 144 provides a non-exclusive safe harbor for selling restricted and control securities without requiring registration.
If all its conditions are met, the seller is deemed not to be engaged in a distribution, and the transaction is therefore exempt under Section 4(a)(1) of the Securities Act.

Key Rule 144 conditions include:

1. Holding period (6 months for reporting issuers; 1 year for non-reporting).
2. Current information about the issuer is publicly available.
3. Volume limitations for affiliates.
4. Manner-of-sale restrictions (for equity).
5. Filing of Form 144 (for affiliates).
   

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Q4: How long must restricted stock be held before sale?

• Reporting companies (Exchange Act reporting under 13 or 15(d)): 6 months.
• Non-reporting companies: 1 year.

The holding period starts on the date of full payment for the securities, not on the issuance date if payment occurred earlier.

Tacking of holding periods may be allowed in reorganizations or conversions if the underlying securities were previously subject to restrictions.

Q5: Can Rule 144 be used for shell companies?

No — Rule 144 is unavailable for securities of an issuer that is, or ever has been, a shell company, unless:

1. The company has ceased to be a shell;
2. It is subject to Exchange Act reporting;
3. It has filed Form 10-type information (the “Super 8-K” disclosure); and
4. At least 12 months have elapsed since that filing.

This “seasoning period” ensures investors have adequate current information about the post-shell operating business.

Q6: What if the company is a “former shell” but now operational?

If the company meets the four conditions above, it is considered a former shell company, and sales under Rule 144 may resume after the 12-month period has run.

Counsel usually provides an opinion letter confirming the issuer’s compliance with the “Form 10-information” requirement.

Q7: Do affiliates have continuing restrictions after the holding period?

Yes. Even after the holding period expires, affiliates must satisfy:

• Current information requirements;
• Volume limits (no more than 1% of outstanding shares or 1% of the average weekly trading volume);
• Manner-of-sale (brokers only, no solicitation or special compensation); and
• Form 144 filing if sales exceed 5,000 shares or $50,000 in any 3-month period.

Non-affiliates are free of these limitations once they meet the holding-period and current-information tests.

Q8: What is a “legend removal” opinion?

Before restricted shares can trade publicly, the transfer agent must remove the restrictive legend.
Issuers typically require a legal opinion letter from securities counsel confirming that the proposed sale complies with Rule 144 or another exemption.

Transfer agents and broker-dealers rely on this opinion to process the transaction.

Q9: What if the issuer is delinquent in its SEC filings?

If the issuer fails to file its periodic reports, Rule 144 becomes unavailable to affiliates and non-affiliates alike until current information is restored.

Sellers must verify that the issuer’s filings are up to date on the SEC’s EDGAR system.

Q10: Are sales of restricted securities on alternative trading systems allowed?

Yes — once the shares are freely tradable, they may be sold through brokers on platforms such as OTCQX, OTCQB, OTCID, or Nasdaq.

However, until the legend is removed and all Rule 144 conditions are met, broker-dealers may not solicit orders or publish quotations under Rule 15c2-11.

Q11: How does Rule 144 apply to convertible notes or warrants?

The holding period begins when the securities are fully paid for and convertible into equity without additional consideration. If conversion requires payment, the clock starts upon conversion.

Q12: Must Form 144 always be filed?

Affiliates must file Form 144 before or at the time of placing an order with a broker if the sale exceeds the 5,000-share or $50,000 thresholds in a three-month period. The form is filed electronically via EDGAR and remains public.

Non-affiliates are not required to file Form 144.

Q13: Can restricted stock be sold under other exemptions?

Yes. Rule 144 is a safe harbor only. Sellers may alternatively rely on:

• Section 4(a)(1) — sales by non-issuers not acting as underwriters;
• Rule 144A — private resales to qualified institutional buyers; or
• Regulation S — offshore transactions.

Each exemption has its own conditions, and counsel should confirm availability.

Q14: What are common reasons Rule 144 sales are denied?

1. The issuer is not current in filings.
2. The shareholder has not met the holding period.
3. The shareholder is an undisclosed affiliate.
4. The company is a shell or a former shell without seasoning.
5. The opinion letter lacks adequate factual support.

Issuers and transfer agents are under no obligation to remove legends unless they have a reasonable basis to believe the sale complies with securities laws.

Conclusion

Restricted and control securities play a central role in private capital formation. Understanding Rule 144 and related exemptions is crucial to ensure the legality of resales and maintain market integrity. A disciplined approach (tracking holding periods, confirming current information, and obtaining qualified legal opinions) protects both investors and issuers from enforcement risk.

If you have questions about the resale of restricted securities or would like to speak with a Securities Attorney, Hamilton & Associates Law Group, P.A. is ready to help. Our Founder, Brenda Hamilton, is a nationally known and recognized securities attorney with over two decades of experience assisting issuers worldwide with going public on the Nasdaq, NYSE, and OTC Markets. Since 1998, Ms. Hamilton has been a leading voice in corporate and securities law, representing both domestic and international clients across diverse industries and jurisdictions. Whether you are taking your company public, raising capital, navigating regulatory challenges, or entering new markets, Brenda Hamilton and her team deliver the experience, strategic insight, and results-driven representation you need to succeed.

To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].

Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com