Restricted Securities

Under SEC Rule 144, restricted stock must generally be:

1. A.Held for a required period before public resaleCorrect - the Rule 144 holding period.
2. B.Converted to bonds firstRule 144 never changes the security into something else. It governs when and in what quantity restricted shares may be resold, and they are resold as the same stock.
3. C.Sold immediately with no limitsThis describes freely tradable registered shares. Restricted stock came into the holder's hands through an unregistered sale, which is exactly why a holding period must run before public resale, with volume limits on top for affiliates.
4. D.Never soldThis overcorrects a real restriction into a permanent ban. Rule 144 is a safe harbor whose purpose is to make resale possible once its conditions have been satisfied.

Why: Rule 144 requires a holding period before restricted securities can be resold publicly, plus volume limits for affiliates.

A reporting company sells newly issued common stock at a negotiated discount to a small group of institutions and agrees to file a resale registration statement afterwards. What is this transaction, and what is the buyers position before that registration is effective?

1. A.A secondary offering, and the buyers receive freely tradeable shares because the class is already registered.Wrong. Registration of a class does not register newly issued shares, and a secondary offering sells existing holders shares.
2. B.A PIPE, and the buyers hold restricted securities until the resale registration statement is effective.Correct. The issuer is public but these particular shares were sold unregistered.
3. C.A Regulation A offering, and the buyers may resell as soon as the offering statement is qualified.Wrong. Regulation A is a qualified public offering route, not a negotiated private sale to selected institutions.
4. D.A shelf takedown, and the buyers receive registered shares priced off the existing shelf.Wrong. A shelf takedown is a registered sale, which is the very thing this transaction avoids.

Why: This is a private investment in public equity, a PIPE: an unregistered sale by an issuer whose shares already trade, usually priced below the market and usually accompanied by a contractual promise to register the shares for resale. Until that resale registration is effective the buyers hold restricted securities and cannot sell them into the public market except under registration or a resale exemption. The discount is compensation for exactly that illiquidity and for the price risk of holding while the registration is prepared. Were the issuer to fail to get the registration declared effective, the buyers exit would fall back on Rule 144.

An investor who holds restricted securities acquired in a Rule 506(b) private placement makes a bona fide gift of some of those shares to her adult child, receiving nothing of value in return. Does this gift constitute a "sale" requiring its own registration or exemption analysis under the Securities Act?

1. A.Yes, any transfer of securities from one person to another, regardless of whether anything of value is exchanged, constitutes a sale requiring its own exemption analysis.Wrong. This ignores the Securities Act's value-based definition of sale.
2. B.No, and the gift also has the effect of removing the restricted status from the securities, since a gift is treated as a fresh, unrestricted acquisition.Wrong. A gift does not cleanse restricted status; the recipient generally steps into the donor's restricted position.
3. C.Yes, but only if the child is not accredited, since only a transfer to a non-accredited recipient requires a fresh sale analysis.Wrong. The sale-versus-gift distinction does not turn on the recipient's accreditation status.
4. D.No -- a bona fide gift with no consideration is not a sale, though the recipient generally takes the securities subject to the same restricted status.Correct. These are two separate questions with two separate answers.

Why: No. A bona fide gift, where the donor receives no consideration of value in return, generally does not constitute a "sale" under the Securities Act's value-based definition. The recipient, however, generally takes the securities subject to the same restricted status the donor held.

An investor buys limited partnership interests in a Regulation D offering and six months later wants to sell them to a friend. What is the principal obstacle?

1. A.The partnership agreement will require the general partner to admit the buyerWrong. That is a real obstacle but it is not the securities-law one the question asks about.
2. B.The interests are restricted securities and cannot be freely resoldCorrect. A resale needs its own registration or exemption.
3. C.Regulation D forbids any resale of interests acquired under itWrong. Resale is constrained rather than prohibited outright.
4. D.The friend would have to be accredited to take the interestsWrong. Accreditation governed the original offering, not every subsequent transfer.

Why: Securities acquired in a Regulation D offering are restricted securities, so they cannot simply be resold into the market and any resale must satisfy a registration requirement or an exemption of its own. This is separate from, and additional to, the transfer restrictions the partnership agreement itself imposes on admitting a substituted limited partner. The restriction exists because the exemption was granted on the basis that the interests were not being distributed publicly, and a free resale would defeat that basis. Had the interests been sold in a registered public offering, this particular obstacle would not arise.