Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing “seed money” or start-up capital to the company. Rule 144(a)(3) identifies what sales produce restricted securities.
Affiliate control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as a director or large shareholder, in a relationship of control with the issuer. Affiliate control means the shareholder has power to direct the management and policies of the company in question, whether through the ownership of voting securities, by contract, or otherwise. If you buy securities from a controlling person or “affiliate,” you take affiliate control securities, even if they were not restricted in the affiliate’s hands. If the shares were otherwise registered and not restricted by Rule 144, the affiliate control restriction will become eligible for the removal of the affiliate control restriction after a period of 90 days.
If you acquire restricted securities, you will almost always receive a certificate stamped with a “restricted” legend. The legend indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from the registration requirements. Affiliate control certificates will be designated as “Affiliate Control” on the face of the certificate, and may or may not have a legend printed on the back, depending on whether they are registered shares or not.