Legend on certificates: Overview, definition, and example
What is a legend on certificates?
A legend on certificates is a written notice or statement that appears on securities certificates (such as stock or bond certificates) that provides important information about restrictions or conditions related to the ownership or transfer of the securities. The legend typically informs the holder about restrictions, such as the inability to transfer the securities without meeting certain legal or regulatory requirements. For example, a legend may indicate that the securities are "restricted" and cannot be sold or transferred unless specific conditions are met, like compliance with securities laws or a lock-up period.
In simpler terms, a legend on a certificate is a warning or notice that explains certain rules or restrictions on how the securities can be used, sold, or transferred.
Why is a legend on certificates important?
A legend on certificates is important because it helps ensure that both the issuer and the holder of securities are aware of any legal, regulatory, or contractual restrictions on the securities. It serves as a reminder that certain actions, like selling or transferring the securities, may be subject to conditions such as regulatory approval or the passing of a specific time period. This helps prevent legal issues, ensures compliance with securities laws, and protects the interests of the issuer, investor, and any involved parties.
For businesses, placing a legend on certificates can help control the flow of securities, ensuring they are not transferred improperly or prematurely. For investors, it clarifies the conditions under which they can trade or transfer their securities.
Understanding the legend on certificates through an example
Imagine a startup company that issues stock certificates to its early investors. As part of the agreement, the investors agree not to sell their shares for a period of one year, known as a "lock-up" period. The company includes a legend on each stock certificate stating: "These shares are restricted and may not be sold, transferred, or otherwise disposed of until one year from the date of issuance." This legend ensures that the investor understands the restriction on the transfer of their shares during the lock-up period.
In another example, an investor purchases securities from a private company, and the certificates include a legend stating that the securities are subject to the Securities Act of 1933 and cannot be resold unless they are registered or exempt from registration. This legend helps the investor understand the legal conditions governing the resale of the securities.
Example of a legend on certificates
Here’s how a legend on certificates might appear:
"The securities represented by this certificate are subject to restrictions on transfer as set forth in the agreement between the issuer and the holder, and may not be sold, transferred, or otherwise disposed of except in compliance with such restrictions. The securities represented hereby have not been registered under the securities act of 1933 and may not be sold, pledged, or otherwise transferred except in accordance with applicable securities laws."
Conclusion
A legend on certificates is an essential tool for communicating important legal and regulatory restrictions regarding the transfer, sale, or use of securities. It ensures that both the issuer and the holder are aware of any applicable limitations, helping to prevent potential legal violations and protect both parties' interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.