Restricted Securities

Restricted securities are securities that are subject to transfer limitations. They are commonly used in private offerings made under an exemption to the registration requirements for sales of securities promulgated by the Securities and Exchange Commission (SEC). Certain exemptions require that the securities not be resold for certain time periods following the initial sale to the shareholder. The sale agreements — such as the stock purchase agreements or subscription agreements — and corporate documents describing such securities typically provide that the securities cannot be resold in the prohibited period following the sale, and are therefore deemed to be restricted. The term restricted securities is sometimes applied to shares issued pursuant to a vesting schedule, which are simply schedules that set forth when, pursuant to time-based or performance-based schedules — or a combination of the two — shares become owned by the shareholder. Prior to vesting, the shares are not technically owned by the shareholder and are usually subject to a repurchase right allowing the company to repurchase any unvested shares under certain circumstances such as, for example, the shareholder quits his or job at the company. Shares issued pursuant to vesting schedules are typically restricted securities, preventing the shareholders from transferring their shares unless under certain limited circumstances.