What Is a Legend?
A legend is a statement on a stock certificate noting restrictions on the transfer of the stock. A stock legend is in most cases put in place on account of the must haves established by the use of the Securities and Exchange Price (SEC) for unregistered securities. A stock legend would perhaps or might not be legally required on the certificate itself, depending on state rules.
Restrictions on the sale or transfer of percentage ownership are not unusual among privately-held corporations. The legend prerequisites on the equity shares warn towards most of the people resale of shares and ask the issuer to interchange the ones shares with legend-free ones instead. A stock legend’s prerequisites and restrictions can be in agreement a company prevent their shares from being purchased too temporarily, which might harm the company.
Key Takeaways
- A legend is a statement on a stock certificate noting restrictions on the transfer or sale of a company’s stock.
- A stock legend is in most cases established on account of the SEC’s must haves for unregistered or restricted securities.
- Restrictions on the sale of stock by way of legends are steadily put in place to control who turns right into a shareholder in a company.
Understanding Stock Legends
The most common legend on private stock certificates incorporates language informing the holder of the limitations on the sale or transfer of unregistered securities. There can be further restrictions on the sale of stock in private companies where shareholders have agreed to a shareholder buy-sell agreement. Ceaselessly, the ones agreements are put in place to control who turns right into a shareholder inside the company. The stock legend outlines the limitations for the sale of unregistered and restricted equity shares. Unregistered shares are merely stock or equity shares that experience now not been registered with the SEC, and due to this fact, have restrictions placed on them for their issuance and resale, which could be outlined beneath.
Restricted Stock
Restricted stock are equity shares that companies issue to executives, keep watch over, and staff along with pre-selected patrons. Restricted stock can be issued to stop the shares from being purchased too temporarily, which might hurt the company. Even though the restricted stock is non-transferrable first of all, it can be purchased at a later date following the top of the vesting period. The vesting period, which may well be 3 to five years, is when staff earn the right kind to legally take ownership of the stock and have the right kind to put it on the market. Generally, restricted stock is positioned in stock benefit plans for staff of a company and the limitations are designed to encourage the employee or govt to stick at the company.
Restricted stock is non-transferable previous to the vesting period has ended and should be traded in compliance with regulations enforced by the use of the SEC. Investors would perhaps acquire restricted stock via a private placement, which is the sale of stock to sure patrons. A personal placement is done in lieu of an initial public offering (IPO) in which shares are purchased publicly on the open market.
Rule 144
SEC Rule 144 outlines the exemptions that let one to advertise unregistered securities. Rule 144 is a collection of regulations that outline the prerequisites in which the sale of unregistered or restricted stock shares can be purchased. Generally, requirements should be met previous to a sale is authorized, at the side of a minimum period in which the stock should be held, which can be up to twelve months. Rule 144 limits the collection of shares being purchased by the use of an affiliate to no more than 1% of the company’s exceptional shares. Moreover, Rule 144 mandates disclosure must haves of a company’s financial history. Financial statements, as an example, want to be made available to most of the people previous to restricted and unregistered shares can be purchased on the open market.
Having the Legend Removed
As a way to have the legend on a stock certificate removed, patrons should contact the company’s shareholder members of the family department to resolve the details of the putting off process. Following that, the company will send a confirmation authorizing its transfer agent to remove the legend. The stock certificates want to be sent to the transfer agent, and the shares will probably be returned without the limitations in place. The ones shares can then be purchased on the public market.
