Removal of legends: Overview, definition, and example
What is removal of legends?
Removal of legends refers to the process of eliminating or modifying certain restrictions or disclaimers, often in the form of text (called "legends"), that are placed on securities, contracts, or documents. These legends typically serve as a notice to investors or parties involved, indicating that the security is subject to specific conditions, such as restrictions on transfer, resale, or certain legal obligations. The removal of legends usually occurs when those restrictions are no longer applicable, such as when securities become freely tradable after a holding period or after the securities have been registered with the appropriate regulatory authorities.
For example, a stock certificate may have a legend stating that it cannot be sold unless registered with the securities commission. Once the stock is registered or the restrictions are lifted, the legend is removed.
Why is removal of legends important?
The removal of legends is important because it signals the removal of legal or contractual restrictions that limit the transferability or liquidity of a security or asset. It allows investors or holders of the asset to freely transfer or sell the asset, which can increase its marketability and value. For businesses, removing legends from securities can be a crucial step in complying with regulatory requirements or fulfilling contractual obligations, allowing the securities to be freely traded on public markets. The removal of legends is a significant event in the lifecycle of securities, often marking a transition to a more accessible or liquid status for investors.
Understanding removal of legends through an example
Let’s say an investor holds shares in a private company, and these shares have a legend stating that they cannot be resold until the company goes public or is registered with the appropriate authorities. After the company successfully registers the shares with the Securities and Exchange Commission (SEC), the legend can be removed, allowing the investor to sell the shares on the open market without restriction.
In another example, a startup company might issue convertible notes to investors, which are initially subject to legends restricting transfer. Once the startup completes a qualifying financing round or goes public, the removal of legends occurs, and the convertible notes are converted into shares that can be freely traded.
An example of a removal of legends clause
Here’s how a removal of legends clause might appear in a securities agreement:
“The Company agrees to remove the legend from the securities held by the Investor upon the Investor’s written request, provided that the securities have been registered under the Securities Act of 1933, or an exemption from registration is available, and all restrictions on transferability are no longer applicable.”
Conclusion
Removal of legends is a crucial step in the life cycle of securities or other assets that have been subject to restrictions. This process allows for the unrestricted transfer and sale of securities, enhancing their liquidity and making them more attractive to potential investors. Understanding the conditions under which legends can be removed ensures compliance with legal and regulatory requirements and helps facilitate the efficient trading of securities in the market.
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.