In the 1990s, many cash-strapped start-up companies turned to stock options for compensation and incentives for executives. The early years of the new millennium saw securities regulators take a closer look at stock options and possible cases of manipulation. In response, some publicly-held corporations have started using 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 category. Companies and underwriters may place restrictions (hence the name) on what the holder can do with the stock, often by specifying that a certain amount of time pass or a goal be met before it can be sold – similar to the vesting period some companies require 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, before selling, the holder of the stock must notify the Securities and Exchange Commission (SEC). The same is true of non-restricted stock held by people the SEC deems to be “insiders”: officers and directors of publicly-traded companies, as well as anyone who owns more than 10 percent of the company’s stock. For restricted stock holders, officers and directors, it doesn’tmatter how many shares they own. While the president, principal financial offerand principal accounting officer or controller are automatically considered
insiders, the term can apply to any executive whose duties provide access to information that could give him an unfair advantage in his personal market transactions.
Typically, 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 no sale is made, the form expires after 90 days.
If you hold restricted stock, or if your position in your company or stock ownership fits the definition of an insider, you will likely be made aware of some 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 gives an annual summary of ownership totals for insiders. Again, the office of the corporate secretary typically handles these filings, but if your name is on them, you should be aware of the totals and transactions being reported.
Your financial advisor can assist you in making sure you’ve met requirements for corporate stock, particularly if you hold restricted stock but have left the corporation. If you face a situation where your restricted stock has not vested but you are considering leaving the company, we can provide guidance on the impact on your portfolio of forfeiting the stock versus potential compensation benefits of another job or opportunity.
