Selling Restricted And Insider Stock
by Takara Alexis

In the 1990s, a lot of cash-strapped start-up companies leaned on stock options for compensation and incentives for executives. The earlier years of the new millennium watched security regulators take a closer look at stock options and possible cases of manipulation. In return, various publicly-held corporations have started to use restricted stock instead.

Generally speaking, restricted stock has been obtained in some way other than by public offering from the company itself or on the secondary market from other shareholders. Stock options don't fall into that classification. Companies and underwriters may place boundaries on what the holder can do with the stock, often by specifying that a certain amount of time pass or a goal be reached before it can be sold - similar to the vesting period some companies demand before employees can access the corporate match in their 401k accounts. If the holder terminates employment before the restricted stock vests, he loses it. Once vested, the holder owns the stock and can sell it if he wishes.

However, prior to selling, the holder of the stock must alert the Securities and Exchange Commission (SEC). The same is true of non-restricted stock held by people the SEC considers to be "insiders": officers and directors of publicly-traded companies, as well as anyone who owns more than 10% of the company's stock. For restricted stock holders, officers and directors, it doesn't matter how many shares they own. While the president, principal financial offer and principal accounting officer or controller are automatically considered insiders, the term can apply to any executive whose duties allow access to information that might give him an unfair advantage in his personal market transactions.

Usually, a publicly-traded company has an office of the secretary, which handles required filings for these transactions. Form 144 gives insiders and holders of restricted stock 90 days to complete a sale of company stock. That doesn't mean the holder must sell any or all of the stock listed on the form. If there is no sale made, the form expires after 3 months.

If you carry restricted stock, or if your status in your company or stock ownership fits the definition of an insider, you will likely be notified of various other forms required by the SEC. Form 3 states the company stock ownership totals for new officers and directors as well as shareholders whose holdings have met or exceeded 10 percent of total shares. Changes to holdings - purchases and sales - are reported on Form 4. Form 5 offers an annual summary of ownership totals for insiders. Again, the office of the corporate secretary typically takes care of these filings, but if your name is on them, you should be mindful of the totals and transactions being reported.

Your financial advisor can help you in making sure you have met requirements for corporate stock, especially if you hold restricted stock but have left the company. If you face a circumstance where your restricted stock has not vested but you're considering leaving the company, you can be provided guidance on the impact on your portfolio of forfeiting the stock versus potential compensation benefits of another job or opportunity.