Legends: Overview, definition and example
What are legends?
Legends refer to specific notations or disclaimers placed on documents, securities, or instruments to provide important information, restrictions, or warnings. In the context of contracts or securities, legends are commonly used to highlight restrictions on transferability, legal disclosures, or other conditions associated with the document or asset.
For example, a legend on a stock certificate might state that the shares are restricted and cannot be sold or transferred without compliance with applicable securities laws.
Why are legends important?
Legends are important because they provide critical information or legal warnings about the rights, limitations, or obligations associated with a document or asset. By including legends, parties ensure compliance with legal and regulatory requirements, reduce misunderstandings, and safeguard against unauthorized actions.
Legends are particularly significant in securities transactions, where they serve to alert holders and third parties about transfer restrictions or legal obligations.
Understanding legends through an example
A startup issues shares to an investor under a private placement agreement. The stock certificates include a legend stating that the shares are “restricted securities” and cannot be sold or transferred without registration under the Securities Act of 1933 or an applicable exemption. This ensures that the investor and subsequent holders are aware of the legal restrictions on the shares.
An example of a legends clause
Here’s how a legends clause might appear in a contract or securities document:
“Each certificate representing the Shares issued under this Agreement shall bear a legend in substantially the following form: ‘These securities have not been registered under the Securities Act of 1933 and may not be offered, sold, or transferred except pursuant to an effective registration statement or an exemption from the registration requirements of the Act.’”
Conclusion
Legends play a vital role in providing critical information and ensuring compliance with legal and contractual obligations. By including legends on documents or instruments, parties can highlight restrictions, warn about potential liabilities, and promote transparency. A well-drafted legends clause helps protect the interests of all parties and ensures adherence to legal requirements.
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.