Restricted and control stock

The two terms describe different problems with the same asset: shares that cannot simply be sold into the open market. Restricted stock is unregistered stock acquired outside a public offering — typically through a private placement, a Regulation D offering, or an employee grant. Control stock is stock held by an affiliate of the issuer, meaning an officer, a director, or a large shareholder generally presumed to own more than 10% of the company. Control stock can be fully registered and still be restricted in how it may be sold, because the seller's relationship to the issuer is what triggers the limits.

SEC Rule 144 is the safe harbor that allows both to be resold publicly. Restricted stock must be held for a minimum period — six months for shares of a reporting issuer, one year for a non-reporting issuer — before it can be sold under the rule. Control stock has no holding period, since the shares were bought in the open market, but an affiliate selling it faces a volume limit: within any 90-day window, the affiliate may sell no more than the greater of 1% of the issuer's outstanding shares or the average weekly trading volume over the prior four weeks.

Rule 144 also imposes procedural conditions: sales by affiliates above a modest threshold require a Form 144 notice to the SEC, current public information about the issuer must be available, and affiliate sales must be handled as ordinary brokerage transactions. A single block can be both restricted and control stock — a private-placement purchase by a company director, for example — in which case both sets of limits apply.

These distinctions appear across FINRA exams. The SIE and Series 6 exams cover Rule 144 in the context of the primary market and the resale of unregistered securities, and the Series 66 covers restricted and control stock as an equity characteristic. Expect questions that hand you a fact pattern and ask which limits apply and how many shares may legally be sold.