Restricted stocks (securities) are stocks acquired not on the open market but by alternative means. Known as private offerings, these stocks are typically obtained through corporate mergers or acquisitions, as awards to company employees or affiliates or as compensation for professional services provided. Restricted stocks are identified with a legend, or notice, placed on the stock certificate, which limits how the stock can be sold. As with most securities investments, there are advantages and disadvantages with restricted stocks.
The sale or acquisition of restricted stock shares is, as the name implies, restricted. The holder might be required to work a certain number of years or meet other specific conditions before the restrictions are lifted and the shareholder can take ownership of the stock. Restricted securities are not registered with the Securities and Exchange Commission, as are stocks that are offered publicly, or sold on the open market. Therefore, restricted stocks cannot be offered on the open market until they have been registered with the SEC or they are determined to be exempt from the standard SEC registration requirements.
Since restricted stock shares are often given as awards to particular employees, they offer several advantages to employees and employers. Restricted stocks can be used as incentives for employees to reach specific performance targets. Shares often include voting rights for employees in company decisions. Restricted stocks always have some value, even if the share price drops lower than the price on the date they were granted to you. The advantage of retaining value means you need fewer shares to enjoy a similar level of benefit as compared to stock options.
If an employee is awarded restricted stock but cannot actually take possession of those shares until the restrictions are lifted, it may not seem like an attractive benefit or motivator to employees. Additionally, restricted stock shares are forfeited by an employee who fails to meet the requirements needed to lift the restrictions. Restricted stock does not guarantee voting rights or receipt of dividends. A further disadvantage of restricted stocks is their inability to possess any value if a market for the shares fails to open at some point. When compared to other employee ownership plans, restricted stocks present a more complex approach and potential financial risks for the stockholder.
To sell your restricted stock shares on the open market, you must meet all the conditions outlined under Rule 144 of the Securities Act of 1933. Once you have met the conditions, before you can offer your restricted securities to the public, the restrictive legend must be removed from the stock certificate. To do this, you will need to contact the company that issued the shares or the company’s transfer agent. Removal of the legend is done solely at the discretion of the issuing company, and disputes are resolved in accordance with state laws.