Restricted Securities

Introduction

You’ve worked hard to get where you are, making it through the lean years with the hope of a return from the stock you earned instead of a high salary or the stock you took as an early investor. Now the company has grown and prospered and you’re looking to enjoy the reward for which you’ve waited so patiently. It’s time to enjoy the comforts you’ve done without over the years ... the luxury car, the dream vacation, the college education for your children, an expanded investment portfolio.

By selling your restricted securities you can begin enjoying the fruits of your labor.

Raymond James is here to help you and your financial advisor through the paperwork that may slow down the transaction process. Regulations may seem overwhelming and complicated at first, but with the help of our experts the transaction can be completed smoothly and in a timely manner.

Federal securities laws strictly govern transactions involving your restricted securities. However, if you qualify, you can sell all or a portion of these securities under Securities & Exchange Commission (SEC) Rules 144, 145 or 701, which provide exemptions from registration under the federal securities laws.

Since the rules, in terms of meaning and application, are not easily understood, this web page reviews the basics, focusing on many of the questions frequently asked by holders of restricted or control securities.

At Raymond James, our specialists are thoroughly familiar with restricted securities rules and can offer you their experience and expertise to assist in the selling and margining of your restricted or control securities.

Then, after your assets are free, your Raymond James financial advisor has a myriad of services you can utilize with your newfound wealth, such as retirement planning, trust services, estate and tax planning, asset allocation and a variety of asset managers, plus much more. It’s part of our service to help you create a comprehensive financial plan once we have completed the restricted or control securities transaction for you.

Sales of Restricted Securities

The complex conditions and procedures of Rules 144, 145 and 701 require special care and handling to ensure that securities sales are made in compliance with the law. Raymond James specialists are qualified to assist you with step-by-step service. Drawing upon the expertise of our sales, trading and operations personnel, your financial advisor will efficiently and effectively coordinate the preparation, execution and clearance of sales under the various rules. As one of the leading trading and block commitment firms in the securities business, we can bring our considerable capabilities to bear in providing proper execution at competitive prices.

Given the extensive experience of Raymond James personnel and the resources at their disposal, sellers of restricted securities can feel confident that their transactions will receive the kind of personal attention they deserve.

Rule 144

Rule 144 allows holders of restricted or control securities to sell those securities in the open market provided certain conditions are met by the seller, the broker and the company.

Restricted Securities

In general, restricted securities are acquired in a nonpublic transaction (private placement). Such securities are unregistered, can only be resold under certain conditions and usually bear a legend to that effect. Restricted securities obtained by third parties as gifts or donations, or pledged for a loan, may be sold under appropriate circumstances through Rule 144.

A Control Person/Control Securities

A control person is anyone who directly or indirectly controls the management and affairs of a company. Senior officers, directors and certain large shareholders are usually considered control persons. Whether a control relationship exists is a factual determination usually made by the company or its legal counsel.

A control person is also defined to include the following: relatives living in the same household as the control person; trusts, estates, corporations or other entities in which the control person has an interest; or trusts and estates in which the control person serves as a trustee, executor or a similar capacity. Once a company determines that an individual is deemed a control person, securities acquired by that person in any manner, including an open market purchase, are control securities.

Conditions of Rule 144 for the Sale of Restricted or Control Stock

Current Public Information

The company whose securities are being sold under the rule must have available “adequate current public information.” Generally, this requires meeting the reporting requirements of the SEC for at least 90 days before the proposed sale and filing all required reports during the 12 months preceding the sale (or such shorter period that the company has been subject to filing requirements).

Holding Period

Restricted securities must be fully paid for and beneficially owned for a period of at least one year prior to sale.

There is no required holding period for control securities that are not also restricted securities. Therefore, a control person who acquires shares through exercise of stock options, or buys stock in the open market, has no Rule 144 holding period (although he or she may be subject to short swing liability if the shares are sold within six months of acquisition or date options are granted).

Amount to be Sold

The amount of securities which may be sold under Rule 144 during any three-month period is the greater of:

• 1% of the class of securities outstanding or
• The average weekly reported volume of trading in the securities during the four calendar weeks prior to the filing of Form 144 (Notice of Proposed Sale) with the SEC.¹

In calculating the maximum number of shares that may be sold, the seller must deduct the number of shares he or she has sold, as well as the number of shares sold within the prior three months by the following:

• Relatives who share the same household
• Any trust or estate in which he or she owns or such relatives collectively own 10% or more of beneficial interest or serves as trustee, executor or similar capacity
• Any corporation or entity in which he or she owns or such relatives collectively own 10% or more of the beneficial interests
• A party to whom he or she donated or pledged any such shares as a gift or in pledge for a loan
• A party selling in concert with him or her²

Filing of Notice Requirements

A completed original and two copies of SEC Form 144 (Notice of Proposed Sale) must be mailed to the SEC at or prior to the time of placing the sell order. If the security is exchange-traded, a copy must also be filed with the principal exchange.³

Manner of Sale

Rule 144 sales must be made in “brokers’ transactions,” that is, in agency transactions, although they may be effected in principal transactions if the broker is a market maker or a block positioner (only if the sale is of block size) in the issue. The broker can inquire only of customers and other dealers who have recently expressed buy interest in the issue. (However, if the dealer purchases the stock as principal, the dealer may solicit buy orders.)

Intent to Sell

The seller of restricted or control securities must have a “bona fide intent to sell” the securities after the filing of the notice with the SEC. SEC rules require the shares be sold within 90 days of filing Form 144.

Exemptions from Certain Requirements 144(k)

Restricted securities may be sold under Rule 144 exempt from volume limitations, filing and manner of sale requirements if the securities have been fully paid for and beneficially owned for at least two years and the seller has not been a control person for at least three months. Estates or beneficiaries of estates that are not control persons are exempt from volume limitations, the holding period and the manner of sale requirements.

¹ Calculations for volume limitations are not available for securities quoted only over the Bulletin Board.

² Sellers acting in concert are treated as one in determining the number of shares that can be sold.

³ A seller does not have to file a notice if within any three-month period he or she sells no more than 500 shares and the aggregate sales price does not exceed $10,000; however, all other requirements of Rule 144 apply.

Rule 145

Rule 145 generally applies to securities received in connection with business combinations such as mergers, consolidations or transfers of assets (Rule 145 transactions). Unless a registration statement provides for resales, such persons must sell in accordance with Rule 144, except that there may not be a holding period or filing of notice requirement. Generally, two years after acquisition of these securities, such persons are free to resell their securities outside of Rule 145, provided they are not at the time control persons of the company.

It should be noted that persons formerly with the acquired company who become control persons of the acquiror company following a Rule 145 transaction must sell their securities subject to Rule 144, except that the one-year holding period may not apply to securities acquired in the Rule 145 transaction.

It should also be noted that when mergers and the like are not covered by Rule 145, the securities acquired are restricted and subject to all of the requirements of Rule 144, including the one-year holding period.

Rule 701

Rule 701 provides an exemption to the registration requirements of the Securities Act of 1933 for securities acquired from the issuer pursuant to certain compensatory stock benefit plans. The most common version is the employee stock option plan.

Most corporations have an S-8 registration statement in effect covering the issuance of stock from the corporation to an employee pursuant to an employee stock option plan or other type of employee benefit plan. The actions allowed under the rule are determined by whether the employee is deemed an affiliate, assuming that the S-8 registration statement is in effect.

If the person holding the securities is not deemed an affiliate of the company 90 days after the issuing company becomes subject to the reporting requirement of the Exchange Act, securities issued under Rule 701 may be sold by that person without compliance to certain Rule 144 requirements. Rule 701 bypasses the current public information, holding period, volume limitations and notice of proposed sale requirement of Rule 144 transactions.

If the person is deemed an affiliate of the company, he or she cannot freely sell the stock. Should an affiliate of the issuer sell shares pursuant to Rule 701, he or she is only exempted from the holding period requirement and must meet all other conditions of Rule 144.

Our Service to You

You will find that we offer restricted or control securities executions at competitive rates. In addition to handling all necessary paperwork, we personally follow your trade through settlement and when the trade has cleared, we can invest your funds in one of our asset management programs, or an interest-bearing account, until you are prepared to employ them.

Your restricted or control securities transaction is only the beginning. Once our professionals have helped you free up your assets, your financial advisor can help you develop a comprehensive investment plan that brings your whole financial picture into view, including personal tax and estate planning. In diversifying your portfolio after the restricted or control securities transaction, you’ll want the professional recommendations that your financial advisor offers.