Stock legend: Overview, definition, and example
What is a stock legend?
A stock legend is a written statement or notice placed on stock certificates that provides important legal information about the securities being issued. It typically outlines restrictions on the transferability of the stock, such as limitations on selling or transferring the shares under certain conditions, often to comply with securities laws or contractual obligations. Stock legends are commonly used in private offerings, where shares are restricted and cannot be freely traded like public shares. The legend serves to inform shareholders and potential buyers about these restrictions and ensure compliance with applicable laws or agreements.
Why is a stock legend important?
A stock legend is important because it provides clear, legally binding information about the restrictions placed on the transfer or sale of shares. It helps ensure that the shareholder and any potential buyers are aware of the limitations governing the shares. For example, in a private company, stock may not be freely transferable, and a stock legend will outline the requirements for transferring the stock, such as obtaining approval from the board of directors or holding the stock for a certain period. This protects the company from unauthorized transactions and ensures compliance with securities regulations, such as those outlined in the Securities Act of 1933.
Understanding stock legends through an example
Let’s say a private company is issuing shares to a group of investors. These shares are restricted because the company is not registered with the SEC and the shares cannot be sold to the public. The company includes a stock legend on the share certificates, stating that the shares cannot be sold or transferred without first complying with the securities laws or receiving approval from the company’s board of directors. The legend might read something like:
"The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred, or otherwise disposed of except pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act of 1933."
This stock legend ensures that the investors are aware of the restriction and the process they need to follow if they wish to transfer or sell the shares.
An example of a stock legend clause
Here’s how a stock legend clause might appear in a shareholder agreement or on a stock certificate:
“The shares represented by this certificate are subject to restrictions on transfer set forth in the Company’s Articles of Incorporation and Shareholder Agreement. No transfer of the shares may be made unless such transfer complies with applicable securities laws and is approved by the Board of Directors. A legend reflecting these restrictions shall be placed on the stock certificate.”
Conclusion
A stock legend is a crucial component in ensuring that the issuance and transfer of shares are compliant with legal and regulatory requirements. It helps protect both the company and its shareholders by clearly outlining any restrictions on the stock’s transferability. Whether in private offerings or situations where shares are not freely tradable, stock legends provide transparency and help ensure that the sale or transfer of shares is conducted according to the necessary laws and agreements.
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.