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Restricted Security
Practical Law Glossary Item 3-382-3767 (Approx. 3 pages)
Glossary
Restricted Security
Restricted securities are:
- Securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering. This includes securities purchased in traditional private placements by the issuer under Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D. It also includes securities purchased in private resales under Section "4(1½)".
- Securities acquired from the issuer that are subject to the resale limitations of Rule 502(d) of Regulation D or Rule 701(c). This covers securities sold pursuant to Rules 505 or 506 of Regulation D.
- Securities acquired in a Rule 144A transaction or chain of Rule 144A transactions.
- Securities acquired from the issuer in a transaction subject to the conditions of Regulation CE (Rule 1001).
- Equity securities of domestic issuers acquired in an offshore transaction or chain of offshore transactions under Rules 901 or 903 of Regulation S.
- Securities acquired in a Rule 801 transaction to the same extent and proportion that securities held by the security holder of the class with respect to which the rights offering was made were restricted securities as of the record date for the rights offering.
- Securities acquired in a Rule 802 transaction to the same extent and proportion the securities that were tendered or exchanged in the exchange offer or business combination were restricted securities.
- Securities acquired from the issuer in a transaction exempt from registration under Section 4(a)(5) of the Securities Act.
(Rule 144(a)(3), Securities Act.)
Securities acquired in a resale transaction relying on new Section 4(a)(7) of the Securities Act are also considered to be restricted securities (even though they are not itemized in Rule 144(a)(3)). Section 4(a)(7) was added to the Securities Act by Section 76001 of the FAST Act and is similar to the so-called Section "4(1½)" procedures for certain unregistered resales (see Legal Update, President Obama Signs the FAST Act, Codifying a New Resale Exemption and Creating Additional Accommodations for EGCs).
Investors cannot freely resell restricted securities to the public unless the sale is exempt from the SEC's registration requirements (or the securities can be sold in a registered offering).
Rule 144 under the Securities Act provides the most commonly used safe harbor for the public resale of restricted securities. For more information on resales of restricted securities under Rule 144, see Practice Note, Resales Under Rule 144.
For a discussion of private placements under Section 4(a)(2) and Regulation D, see Practice Note, Section 4(a)(2) and Regulation D Private Placements.
For a discussion of private resales under Section "4(1½)" and Rule 144A, see Practice Note, Resales Under Rule 144A and Section "4(1½)".
For a discussion of Regulation S transactions, see Practice Note, Regulation S Transactions.