Securities Legends

Understanding Securities Legends: What They Are and Why They Matter

If you’ve ever looked at a stock certificate or reviewed a private placement memorandum (PPM), you’ve likely come across a securities legend—a legal disclosure stamped or printed on a security indicating certain restrictions or legal conditions attached to its transfer or resale.

For attorneys, fund managers, compliance professionals, and private issuers, understanding securities legends is essential to maintaining regulatory compliance, protecting investor disclosures, and preparing for future liquidity events.

What Is a Securities Legend?

A securities legend is a notation placed on stock certificates, convertible notes, or digital security records that discloses restrictions on transferability or resale, usually in accordance with U.S. securities laws.

Securities legends serve as a legal warning to investors, brokers, and transfer agents that the security cannot be freely traded until specific legal conditions are met, such as registration or the availability of an exemption (e.g., under Rule 144, Reg D, or Reg S).

Common Types of Securities Legends

Securities legends may vary depending on the type of offering, jurisdiction, and investor category. Here are the most frequently used:

1. Restricted Securities Legend

• Used for unregistered securities sold in private offerings (e.g., under Regulation D)

• Typically states that the securities are not registered and may not be resold without an exemption

• Triggered in offerings involving Rule 506(b), 506(c), or Section 4(a)(2) transactions

2. Affiliate (Control Person) Legend

• Appears on securities held by corporate insiders, such as directors, officers, or 10%+ shareholders

• Indicates that resale is subject to Rule 144 volume and manner-of-sale limitations

3. Regulation S Legend

• Applies to offshore securities offerings under Regulation S

• Warns U.S. persons that the securities are not registered and cannot be offered into the U.S. for a defined period (usually 6 or 12 months)

4. ERISA Legend

• States that securities should not be transferred to or held by ERISA-regulated benefit plans (to avoid triggering fiduciary responsibility or plan asset issues)

5. Blue Sky Legend

• Required by certain U.S. states to comply with state-level securities regulations (varies by jurisdiction)

6. Rule 144A Legend

• For institutional offerings under Rule 144A

• Indicates resale is limited to Qualified Institutional Buyers (QIBs) only

Why Securities Legends Matter

Securities legends are more than boilerplate—they are legally binding notices that help issuers:

• Ensure compliance with SEC and state regulations
• Prevent illegal resales or transfers of unregistered securities
• Control secondary market activity in private and pre-IPO shares
• Assist transfer agents and broker-dealers in vetting legal sale conditions
• Protect the issuer and investor from inadvertent violations

Failure to include proper legends can result in loss of exemption, civil liability, or SEC enforcement.

How to Remove a Securities Legend

Investors looking to sell restricted or control securities must obtain legal clearance to have the legend removed. The process typically involves:

1. Submitting a written request to the issuer or transfer agent

2. Providing supporting documents, such as a legal opinion letter

3. Verifying holding period (6 or 12 months) and compliance with Rule 144 or other exemption

4. Working with legal counsel to prepare a Rule 144 opinion letter confirming eligibility for resale

Once cleared, the legend may be removed, allowing the shares to be sold on the secondary market or transferred to a new owner.

Best Practices for Issuers and Legal Advisors

• Clearly disclose legends in offering documents (PPMs, SAFTs, term sheets)
• Coordinate with your transfer agent on legend placement and removal procedures
• Educate investors on resale restrictions and applicable holding periods
• Update legends to reflect current regulatory standards, especially for digital or tokenized securities
• Use standard legend language approved by counsel to avoid ambiguity

When to Expect a Securities Legend

Final Thoughts

Securities legends play a vital legal role in managing risk and maintaining compliance in private capital markets. Whether you’re an attorney drafting offering documents, a fund manager onboarding investors, or a shareholder preparing to sell restricted stock, understanding legends is essential to navigating U.S. securities law.

Need help drafting or removing a securities legend? We offer legal-grade legend templates, Rule 144 legal opinion letters, and compliance tools to ensure your capital raise or secondary sale proceeds smoothly and lawfully.