What is restricted stock? (2024)

May 30, 2019

Restricted stock or restricted securities is unregistered stock that is not fully transferable until certain conditions are met and they must be traded in compliance with SEC regulations. After the conditions are met stock is no longer restricted and it becomes transferable.

Restricted stocks are often given to employees as a compensation that typically become transferable after certain conditions are met like continued employment for a period of time before vesting or achievement in particular product-development milestones, earning per share goals or other financial targets. Restricted stock is also given to corporate insiders like directors and executives, often after merger and acquisition, underwriting and affiliate ownership to prevent early selling of stock that could negatively affect the company. Corporate affiliates can also lose the right on stock if they leave the company, fail to meet certain performance goals or break SEC trading restriction rules. Conditions under which restricted stock can be sold and resold are outlined in Rule 144, a SEC regulation.

There are two types of restricted shares: restricted stock units and restricted stock awards. Restricted stock units are basically a promise that employer gives to employee that he will give him certain number of company's shares at predetermined date in the future. RSUs don't have voting rights until they are exercised and converted into stock. Employee can choose to receive cash instead company's stock. Restricted stock awards cannot be redeemedfor cash because owners receive the stock immediately without delay and it comes with voting rights.

Company marks stock with restrictive legend which means that securities are not registered with SEC and they cannot be resold unless they are exempt from registration. Legend is removed and restricted stock becomes eligible for sale when condition under Rule 144 are met. If restricted stock is in possession of company's non-affiliate holding period is between 6 and 12 months but if company is or ever was a shell conditions are more strict. For SEC reporting issuers for at least 90 days and must file all required SEC reports for holding period of 6 months. This period is prolonged to 12 months if the issuer has delinquentfilings or is not current in public information which is the same as holding period for non-reporting companies.

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