Unregistered Shares

Unregistered shares (also called restricted stock) are securities that are not registered with the Securities and Exchange Commission (SEC). They are usually issued through private placements, Regulation D offerings and employee stock benefit plans, as compensation for professional services or in exchange for funding a startup company. For example, a privately-held company might issue unregistered shares to its executives and board members as part of their compensation package.

Unregistered shares have fewer investor protections and different risks compared to registered securities. As a result, companies can only sell unregistered shares to "qualified investors." Qualified investors consist of high-net-worth ($1 million or more) and/or high-income ($200,000 per year or more for individuals; $300,000 per year or more for married couples) investors that the SEC considers savvy enough to make such investments. In the past, soliciting or advertising unregistered shares was prohibited, but in 2013, the SEC adopted Rule 506(c) as part of the Jumpstart Our Business Startups (JOBS) Act, allowing certain unregistered securities to be solicited and advertised.

The sale of unregistered shares is typically considered a felony, but there are exceptions to this rule.

SEC Rule 144 lays out the conditions under which unregistered shares may be sold:

• They must be held for a prescribed period. 
• There must be adequate public information about the security’s historical performance.
• The sale must be of less than one percent of shares outstanding and less than one percent of the previous four weeks’ average trading volume.
• All normal trading conditions that apply to any trade must be met.
• Sales of more than 500 shares or more than $10,000 worth must be preregistered with the SEC. An exception to this condition occurs if the seller is not associated with the company that issued the unregistered shares (and has not been associated with it for at least three months) and has owned the shares for more than one year.

Unwitting investors can be taken advantage of through unregistered securities scams. These scams usually advertise themselves as private offerings with little or no risk and high returns. These offerings typically arrive unsolicited and sound too good to be true. Investors can find out if a particular security is registered by looking it up in the SEC’s EDGAR database online. Stocks traded by the average investor are all registered.

The SEC recommends that investors should be on the lookout for some of these common signs of potential fraud when considering investing in an unregistered offering.

1. Claims of high returns with little or no risk
2. Unregistered investment professionals
3. Aggressive sales tactics
4. Problems with sales documents
5. No requirements on net worth or income
6. Only a salesperson seems to be involved
7. Sham or virtual offices
8. The company is not in good standing or not listed
9. Unsolicited investment offers
10. Suspicious or unverifiable biographies of management or the promoters