Stock Legend – Everything You Need To Know
Stock legend that’s most common on private stock certificates consists of language that informs holders about transfers or sales.
Stock Legends are essentially a statement present on stock certificates, and lists the restrictions regarding stock transfers. If you are new to stock legends, it’s worth knowing that they are mostly used because of the requirements put forward by the SEC rule 144 (Securities and exchange commission) for any unregistered security.
Restriction on the transfer or sale of a share ownership is quite common. This is especially true when talking about privately held companies. In case you didn’t know, there are some legend conditions present on equity shares, and they are there to give warning against reselling shares publically. What’s more, these conditions also ask issuers to use legend free variants and replace the current shares.
The restrictions and conditions of a stock legend can massively help an organization save their shares by making sure they are not sold in a very short period, which could of course, be harmful down the line.
What is a Stock Legend?
Generally, the legend that’s most common on private stock certificates consists of language that informs holders about transfers or sales related restrictions regarding unregistered securities. You may also find some extra restrictions on the stock sales in private companies, in which shareholders make a buy and sell agreement with other shareholders.
In most cases, the purpose of placing these requirements is to control whoever ends up becoming the company’s shareholder. So in essence, stock legends basically highlight the restrictions pertaining to the restricted and unregistered equity share’s sales. As mentioned earlier, unregistered shares are equity or stock shares that aren’t registered with the securities and exchange commission. It is the main reason why they have restrictions for their resale and issuance.
The certificate also has the executive’s signatures printed on them. However, there are some certificates where people sign with pens. Securities in the present day, however, use electronic processes exclusively, which some people refer to as a book entry form. These methods are excellent for eliminating the use of paper for issuing certificates for showcasing an ownership.
The main problem with book entry was that security ownership was never transferred physically during an exchange. Instead, accounting entries only undergo changes in the commercial financial institution’s books where investors focus on maintaining accounts.
Why is a Stock Legend Important?
In most privately held organizations these days, shareholders agree to limit the stock transfer in a buy-sell agreement, shareholder’s agreement or bylaws. Generally speaking, shareholders prefer to restrict stock transfers, as they want to have their say when it comes to who will own or run the business with them.
Sometimes shareholders do not want friends, their spouse or even children of fellow owners running the business in case an untimely accident or death occurs. Mostly, the majority shareholders agree to transfer the shares of the shareholder.
What happens if the Stock Legend is not Included in the Stock Certificate?
Even if every shareholder mutually agrees to putting a restriction on share transfers, if someone from the third party gets the stock certificate with the absence of a legend possessing the restriction, it is possible that party would not be bound by said restriction. In some cases, they may even own those shares against the other shareholder’s will.
For example, the law in Pennsylvania states that a restriction is essentially ineffective unless it is especially mentioned on the stock certificate. The legend essentially notifies everybody about the restriction’s presence so individuals cannot say that they did not know about it. In most cases, the shareholder’s agreement states that a stock legend must be present on stock certificates and that stock certificate legend should suit the language in question.
Restricted and Control Securities
Once someone obtains restricted securities, they must get an indemnity from the registration requirements of the Securities and Exchange commission for selling them in the public market. The Rule 144 makes it possible to resell control and restricted securities publicly as long as you meet some conditions. Before we proceed however, let us discuss what restricted and control securities actually are.
What are Restricted and Control Securities?
Restricted securities are acquired in private, unregistered sales from an issuer’s affiliate or issuing company. Usually, investors get these securities from regulation D offerings, private placement offers, or even employee stock benefit plans for their professional services. However, some companies also offer these securities for offering startup capital or seed money.
As far as control securities go, they are held by the issuing company’s affiliate. The affiliates are usually large shareholders, directors, executive officers, and others. Control essentially means the ability to direct a company’s policies and management, whether it is through contract or voting security ownership. If you obtain restricted securities, a certificate with the stamp of restrictive legend accompanies it. On the other hand, control security certificates don’t come with a legend stamp.
Rule 144 is a renowned safe harbor, which shareholders use for selling unregistered stock on public marketplaces. If you did not register your shares with the Securities and Exchange commission, you can depend on exemption by registering. Let us take a look at what this rule is and how it relates to stock legends.
What is Rule 144?
As mentioned before, the SEC Rule 144 highlights any exemption that lets an individual give away unregistered securities. It would be fair to say that this rule is a list of regulations outlining the situations where you can sell restricted or unregistered stock shares. Traditionally, one must fulfill some criteria before a sale gets the green light. This comes with a minimum period where you can hold the stock for around one year. What’s more, this rule also necessitates disclosure about the financial history of an organization.
Conditions of Rule 144
You must meet a certain list of conditions in order to fulfill the SEC rule 144 the right way. Here is look at some of the most important ones:
- First, you must meet a particular holding period, which is six months for public companies. This tenure begins exactly when a holder buys their securities.
- There must be an adequate amount of public info for a company’s investors. This includes information regarding directors, officers and others.
- If the selling party is the company’s affiliate, they are not allowed to resell over 1% from the overall outstanding shares in any three month period.
- It is important to follow the trading rules that apply to any type of trade Brokers, in particular, you can’t ask for buy orders.
- The securities and exchange commission needs an affiliated seller for filing a sale notice proposition, in case the value of the sale goes over $50,000 within a period of three months or there are over 5,000 proposed shares on sale.
How are Legends Removed from Stock Certificates
The stock legend certificate that represents restricted securities has a restrictive legend that mentions that you cannot resell your shares without qualifying for exemptions or effective registration.
The exemption that is arguably the most common from the registration would be the resale exemption listed by Rule 144. In case a holder fulfills rule 144s requirements, they can qualify to work with the transfer agent for removing the restrictive legend. This agent would be the only party capable of removing the said restrictive legend.
What’s more, a holder should be able to offer documentation that the transfer agent asks for. Traditionally, this documentation includes the opinion letter of an attorney that certifies the entire requirement of Rule 144 is fulfilled, the authorization of the issuer, and a letter that proves the representation of Rule 144.
That said, the transfer agent should have consent of the issuer for removing the restrictive legend, but the holder should also provide the entire documentation asked for by the transfer agent (could include the opinion letter from the attorney). It is also worth keeping in mind that you cannot remove the legend until the holder comes up with all of the documentation.
The things that shareholders need to submit are:
- The certificate
- Attorney opinion letter that shows you fulfilled all of the requirements listed by Rule 144
- Other documents given by the agent for removing the legend
Want to know more about Stock Legends?
People often encounter disputes when trying to remove a legend, and in such cases, there is little to no intervention from the Securities and Exchange Commission. At the end of the day, legend removal comes down to the discretion of those who are issuing the security. Because of its, its important to keep all your stock certificates in one place, like an equity management platform like Eqvista.
Eqvista is a leader in providing equity management and share certificate software. Eqvista can handle all equity-related activities, from the issuance of new share certificates, to signing and distributing them to your shareholders, all from one place. Here is the range of activities we support. To know more, reach us today.