What Is a Legend?

A legend is a statement on a stock certificate noting restrictions on the transfer of the stock. A stock legend is typically put in place due to the requirements established by the Securities and Exchange Commission (SEC) for unregistered securities. A stock legend may or may not be legally required on the certificate itself, depending on state laws.

Restrictions on the sale or transfer of share ownership are common among privately-held corporations. The legend conditions on the equity shares warn against the public resale of shares and ask the issuer to replace these shares with legend-free ones instead. A stock legend's conditions and restrictions can help a company prevent their shares from being sold too soon, which might harm the company.

Key Takeaways

  • A legend is a statement on a stock certificate noting restrictions on the transfer or sale of a company's stock.
  • A stock legend is typically established due to the SEC's requirements for unregistered or restricted securities.
  • Restrictions on the sale of stock via legends are often put in place to control who becomes a shareholder in a company.

Understanding Stock Legends

The most common legend on private stock certificates contains language informing the holder of the restrictions on the sale or transfer of unregistered securities. There may also be further restrictions on the sale of stock in private companies where shareholders have agreed to a shareholder buy-sell agreement. Often, these agreements are put in place to control who becomes a shareholder in the company. The stock legend outlines the restrictions for the sale of unregistered and restricted equity shares. Unregistered shares are merely stock or equity shares that haven't been registered with the SEC, and therefore, have restrictions placed on them for their issuance and resale, which are outlined below.

Restricted Stock

Restricted stock are equity shares that companies issue to executives, management, and employees as well as pre-selected investors. Restricted stock can be issued to prevent the shares from being sold too soon, which might hurt the company. Although the restricted stock is non-transferrable initially, it can be sold at a later date following the end of the vesting period. The vesting period, which might be three to five years, is when employees earn the right to legally take ownership of the stock and have the right to sell it. Typically, restricted stock is found in stock benefit plans for employees of a company and the restrictions are designed to encourage the employee or executive to remain at the company.

Restricted stock is non-transferable before the vesting period has ended and must be traded in compliance with regulations enforced by the SEC. Investors may acquire restricted stock through a private placement, which is the sale of stock to certain investors. A private placement is done in lieu of an initial public offering (IPO) in which shares are sold publicly on the open market.

Rule 144

SEC Rule 144 outlines the exemptions that allow one to sell unregistered securities. Rule 144 is a set of regulations that outline the conditions in which the sale of unregistered or restricted stock shares can be sold. Typically, criteria must be met before a sale is allowed, including a minimum period in which the stock should be held, which can be up to one year. Rule 144 limits the number of shares being sold by an affiliate to no more than 1% of the company's outstanding shares. Also, Rule 144 mandates disclosure requirements of a company's financial history. Financial statements, for example, need to be made available to the public before restricted and unregistered shares can be sold on the open market.

Having the Legend Removed

In order to have the legend on a stock certificate removed, investors should contact the company's shareholder relations department to find out the details of the removal process. Following that, the company will send a confirmation authorizing its transfer agent to remove the legend. The stock certificates need to be sent to the transfer agent, and the shares will be returned without the restrictions in place. These shares can then be sold on the public market.

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