🔒 Understanding Restricted Shares
After investing in a private company, you may discover that your shares are marked as restricted rather than “free trading.” This is completely normal — especially in early-stage or crowdfunded investments — and reflects compliance with U.S. securities laws designed to protect both issuers and investors.
This article explains what restricted shares are, why they exist, and how they affect your ability to sell or transfer your securities.
📌 What Are Restricted Shares?
Restricted shares are securities that are not freely tradable on the open market due to regulatory or contractual limitations. These restrictions typically apply to shares issued through private offerings and are governed by SEC rules to prevent premature resale or market manipulation.
Restricted shares are common in offerings made under:
Regulation D (e.g., Rule 506(b), 506(c))
Regulation A (Tier 1 or Tier 2)
Regulation Crowdfunding (Reg CF)
Rule 144 of the Securities Act of 1933
⏳ Common Reasons Shares Are Restricted
Your shares may be considered restricted for any of the following reasons:
1. Regulatory Holding Period
Shares purchased in private offerings are often subject to mandatory holding periods. For example:
Under Reg CF, securities cannot be resold for one year unless transferred under limited exemptions (e.g., to family members or the issuer).
Under Rule 144, restricted securities from Reg D offerings typically require a six-month to one-year holding period (depending on the issuer’s SEC-reporting status).
2. Issuer-Imposed Restrictions
The company may have additional restrictions outlined in your subscription agreement or shareholder agreement. For example:
You may need issuer approval to transfer or sell shares
There may be lock-up periods tied to fundraising or exit events
Transfers may be restricted to protect cap table integrity
3. Lack of Market or Transferability
Restricted shares are often in non-public companies, meaning there is no public market to sell them on — even if you're legally allowed to. The issuer may not support secondary transfers, or may not be registered with DTC or broker-dealer platforms.
🔄 What If I Want to Sell or Transfer My Shares?
Before attempting to sell or transfer your shares, check the following:
Is the holding period complete?
Are there issuer restrictions in your investment documents?
Has the issuer or transfer agent provided approval?
Do you have access to a secondary market or buyer?
Will the recipient qualify under a permitted exemption?
📌 If your shares are held via a transfer agent, you may need to submit a legal opinion or complete a transfer request form to proceed.
🆓 What Are “Free Trading” Shares?
“Free trading” shares are securities that are:
Registered with the SEC or sold under an exemption that permits immediate resale
Not subject to holding periods or resale restrictions
Freely transferable without the need for issuer approval
These are more commonly issued in public company offerings or registered direct listings, not private investment rounds.
📬 How to Know If Your Shares Are Restricted
Review your subscription agreement and offering documents
Look for notations in your book-entry statement, share certificate, or investor dashboard
Contact the issuer or transfer agent for clarification
If your shares were issued under Reg CF, Reg D, or Reg A, they are likely restricted
🧠 Final Note
Holding restricted shares is common in early-stage investing. While they can’t be sold freely, they still represent equity ownership in the company and may offer upside in future liquidity events (e.g., acquisitions, IPOs, or public listings).
If you have questions about your specific investment’s restrictions, consult with:
The issuer’s investor relations team
The transfer agent handling your shares
Or a securities attorney for legal advice on resale eligibility