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Explanation of Restrictive Legends

Restrictive legends, in the realm of Rule 144, are one means of identifying “restricted securities“. Restrictive legends are stamped or printed on the certificate or instrument, face or reverse, of restricted securities and usually begin with “These securities are not registered . . . . ” Restricted securities that are not represented by a certificate (generally referred to as “book entry”) will have a notation of restrictions in the stock register or record and receipt given to the stockholder. The purpose of the restrictive legend or notation is to protect the issuing company from loosing its private placement exemption for the initial sale of the securities and to notify the investor that the restricted securities cannot be resold into the public securities market without satisfying certain requirements.

It is the view of that a restrictive legend is in the nature of a contract between the issuing company and the stockholders. Most legends require an opinion of counsel, securities counsel or qualified securities counsel for legend removal. Some few legends require an opinion from the issuing company’s counsel. An issuing company whose legend does not specify a requirement that its own counsel give the opinion cannot legally impose that requirement on the stockholder, even though a very few issuing companies attempt to do so. In these cases, the stockholder has little recourse other than to request an opinion from the issuing company’s counsel.

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