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SEC Law: Rule 144

What are restricted securities? Do they differ from restricted stock?
Don't confuse restricted securities and restricted stock. They are very different.

Restricted Stock

Restricted stock, and its nearly identical twin restricted stock units (RSUs), denotes an outright grant of company stock to employees or other service providers. The stock is "restricted" because it is subject to a vesting schedule, which can be based on time or performance goals, and is governed by other limits on transfers or sales that the company can impose.

Before dilution concerns and changes in stock option accounting made restricted stock and RSUs more attractive to companies, these awards were usually granted only to key employees and executives. Many companies now grant restricted stock and RSUs more broadly to employees and managers either in place of stock options or in combination with them. A survey of 200 major companies by Charles Schwab in 2009 found that 64% now grant restricted stock/RSUs, and this figure is creeping up on stock options (71% of the companies).

For more survey data about stock grants, and for related examples, see another FAQ.

Restricted Securities

Restricted securities are shares that are not registered with the SEC and are resold under SEC Rule 144 or another exemption. The restrictions in restricted securities come from the securities laws, whereas the restrictions in restricted stock come from your company. When the shares are owned by a senior executive or director (i.e. an affiliate), they are also called control stock, even when acquired from an open-market purchase or from stock compensation. Technically, the phrase "restricted shares" also refers to restricted securities, though some companies use "restricted shares" to mean restricted stock grants.

When you acquire restricted securities, the stock certificate will have a legend stamp indicating that the shares are restricted and therefore cannot be resold unless they are registered with the SEC or unless an exemption applies. As explained in another FAQ, this legend will need to be removed before you can resell the stock.

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