Restriction on sale of securities: Overview, definition and example
What is restriction on sale of securities?
A restriction on sale of securities refers to a contractual or regulatory limitation that prevents the holder of securities (such as stocks, bonds, or warrants) from selling, transferring, or otherwise disposing of them under certain conditions or within a specific timeframe. These restrictions are commonly imposed to ensure compliance with securities laws, protect market stability, and maintain the interests of the issuing entity or its shareholders.
Such restrictions may arise in contexts like private placements, employee stock grants, initial public offerings (IPOs), or agreements between shareholders. Common types include lock-up periods, holding requirements, or limitations on transferring shares to third parties.
Why is restriction on sale of securities important?
Restrictions on the sale of securities are important because they protect the issuing company, investors, and the broader market from adverse effects, such as excessive volatility or breaches of securities regulations. For companies, these restrictions help ensure stability, particularly during critical periods like IPOs or mergers. For regulators, they safeguard compliance with laws governing the sale and transfer of securities, such as the U.S. Securities Act of 1933.
By including clear restrictions on the sale of securities in agreements, parties can prevent disputes, ensure compliance, and maintain transparency regarding the terms under which securities can be sold or transferred.
Understanding restriction on sale of securities through an example
Imagine an employee receives stock options as part of a compensation package. The agreement includes a restriction on the sale of these shares, specifying that the employee cannot sell or transfer the shares for one year after exercising the options. This restriction ensures the employee aligns with the company’s long-term goals and prevents market disruption.
In another example, a company conducts an IPO and imposes a 180-day lock-up period on its executives and major shareholders. During this period, these individuals cannot sell their shares, protecting the company’s stock price from a potential flood of sales immediately after the IPO.
An example of a restriction on sale of securities clause
Here’s how a restriction on sale of securities clause might appear in an agreement:
“The Holder agrees that the Securities issued under this Agreement shall not be sold, transferred, assigned, or otherwise disposed of except in compliance with applicable securities laws and the terms of this Agreement. The Holder further agrees to a lock-up period of [insert duration] during which no sale or transfer of the Securities shall occur without the prior written consent of the Issuer. Any unauthorized sale or transfer shall be deemed null and void.”
Conclusion
Restrictions on the sale of securities are essential for maintaining market stability, ensuring compliance with securities laws, and protecting the interests of the issuing company and its shareholders. By clearly defining these restrictions in agreements, companies can reduce risks, promote transparency, and foster trust among investors. A well-drafted restriction clause ensures that all parties understand their obligations and the conditions under which securities can be sold or transferred.
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.