How Control and Restricted Stock Work, How Rule 144 Applies, and What the Exam Tests

Restricted stock is stock acquired in an unregistered transaction, such as a private placement, so it cannot be freely resold until it meets the conditions of SEC Rule 144. Control stock is stock owned by an affiliate of the company, such as a director, executive officer or major shareholder, and it is subject to Rule 144’s resale conditions however it was acquired, even if it was bought on the open market.

The two labels are about different things. “Restricted” describes how the stock was acquired, while “control” describes who owns it, which is why a single block of shares can be restricted, control, both or neither.

This guide covers what each term means, how Rule 144 works, the holding periods and volume limits, worked examples, a client scenario, the exam traps candidates fall for and five practice questions with explanations. Preparing for your exam? Watch FRC’s Series 65 playlist on YouTube, with exam traps called out in every topic.

Why Resale Rules Exist

The Securities Act of 1933 requires securities to be registered before they are offered to the public, unless an exemption applies. Most investors never think about this when they sell shares, because ordinary trades between investors on an exchange are exempt.

That exemption, in Section 4(a)(1), covers transactions by anyone other than an issuer, an underwriter or a dealer. The problem is that someone who buys unregistered shares and quickly resells them to the public, or a company insider who sells a large block, can end up acting like an underwriter, distributing securities to the public without the protection registration provides.

Rule 144 solves that problem. It is a safe harbor: if a seller meets its conditions, they are not treated as an underwriter, and they can sell restricted or control stock publicly without registration.

Where This Topic Appears on the Exams

Rule 144 appears across the SIE, the Series 7 and the Series 65, usually in questions about holding periods, volume limits and who counts as an affiliate. Advisers and representatives need it because clients who are executives, founders or private investors often hold these shares.

FRC’s Series 65 Exam Preparation course covers securities registration, exemptions and the rules that govern client accounts, and the exam requires no sponsor. The SIE Examination Preparation course covers restricted and control securities as part of the exam you can pass before you are hired, and the Series 7 Exam Preparation course takes the topic further for registered representatives.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. Rule 144 is one of the most numbers-driven topics on the exams, which makes it one of the most learnable.

What Restricted Stock Is

Restricted securities are securities acquired in an unregistered, private sale from the issuer or from an affiliate of the issuer. Common examples include shares bought in a private placement under Regulation D, shares received in a private merger, and shares received as compensation under certain employee benefit plans.

Restricted stock certificates, or their electronic records, usually carry a legend stating that the shares have not been registered and cannot be resold without registration or an exemption. Before the shares can be sold, the legend must be removed, which typically requires the issuer’s transfer agent and an opinion from the issuer’s legal counsel.

Restricted status attaches to the shares, not the person. Anyone who acquires stock in an unregistered offering, from a wealthy individual to a small company founder, holds restricted securities.

What Control Stock Is

Control securities are securities held by an affiliate of the issuer. An affiliate is a person who directly or indirectly controls, is controlled by, or is under common control with the issuer, which typically includes directors, executive officers and large shareholders.

There is no fixed ownership percentage in the rule itself, but holders of 10% or more of a company’s voting stock are commonly treated as affiliates on the exams. Immediate family members living in the same household as an affiliate are usually treated the same way.

Control status attaches to the person, not the shares. If a company’s chief executive buys shares on the open market, those shares are not restricted, because they were bought in a registered public market, but they are control securities, because the buyer is an affiliate.

How the Two Labels Combine

Because the two labels describe different things, a block of shares can fall into any of four categories. Shares bought on an exchange by an ordinary investor are neither restricted nor control.

Shares bought in a private placement by an ordinary investor are restricted but not control. Shares bought on the open market by a director are control but not restricted.

Shares bought in a private placement by a director are both restricted and control. That last group faces the full set of Rule 144 conditions, including the holding period and the affiliate volume limits.

The Five Conditions of Rule 144

Rule 144 sets out five conditions. Which ones apply depends on whether the seller is an affiliate and whether the company reports to the SEC.

The first is the holding period, which applies only to restricted securities. The second is current public information about the issuer, the third is a volume limit, the fourth is the manner of sale, and the fifth is filing a notice on Form 144.

Affiliates must generally meet all applicable conditions every time they sell. Non-affiliates holding restricted stock face fewer conditions, and after enough time has passed, none at all.

Condition One: The Holding Period

For restricted securities, the holding period depends on the issuer. If the company has been reporting to the SEC under the Securities Exchange Act of 1934 for at least 90 days, the holding period is six months.

If the company is not a reporting company, the holding period is one year. The holding period begins when the securities are bought and fully paid for.

Control securities that are not restricted have no holding period at all. A director who buys shares on the open market can sell them under Rule 144 at any time, subject to the other conditions and to separate insider trading and short-swing profit rules.

Condition Two: Current Public Information

Before shares can be sold under Rule 144, there must be adequate current public information about the issuer. For a reporting company, that generally means it is up to date with its required SEC filings, such as its annual and quarterly reports.

For a non-reporting company, certain basic information about the company, its business and its finances must be publicly available. The purpose is to make sure buyers in the public market have enough information to make an informed decision.

For non-affiliates, this condition applies only for a limited time. Once they have held restricted shares of a reporting company for one year, they no longer need to meet it.

Condition Three: The Volume Limit

Affiliates are limited in how much they can sell. In any three-month period, an affiliate can sell no more than the greater of 1% of the company’s outstanding shares or the average weekly trading volume over the four calendar weeks before the Form 144 notice is filed.

For securities that are not listed on an exchange, only the 1% measure applies. The limit covers all sales by the affiliate and certain related persons during the three-month period, so a seller cannot get around it by splitting sales across family members or accounts.

Non-affiliates selling restricted securities are not subject to the volume limit. It exists to stop insiders from flooding the market with large blocks of stock.

Condition Four: Manner of Sale

When affiliates sell equity securities under Rule 144, the sale must be handled as a routine trading transaction. That generally means a broker’s transaction, a sale directly to a market maker or a riskless principal transaction.

The seller and the broker cannot solicit orders to buy the shares, and the broker cannot receive more than the usual commission. These rules keep the sale looking like ordinary trading rather than a marketing campaign.

The manner of sale requirement applies to affiliates only. Non-affiliates selling restricted securities do not have to meet it.

Condition Five: Form 144

An affiliate must file a notice on Form 144 with the SEC if they plan to sell more than 5,000 shares, or shares worth more than $50,000, in any three-month period. The form must be filed at or before the time the sale order is placed, and since 2023 it has been filed electronically.

The filing identifies the seller, the securities, the broker and the amount being sold, and it is publicly available. Investors watch Form 144 filings because they show when insiders plan to sell.

If the affiliate does not sell the shares within three months of filing, they must file an amended notice before selling. Non-affiliates do not need to file Form 144.

How Non-Affiliates Sell Restricted Stock

For a non-affiliate holding restricted shares of a reporting company, the rules are straightforward. After six months, they can sell as long as current public information is available, with no volume limit, no manner-of-sale rules and no Form 144.

After one year, they can sell freely, with no conditions at all. For a non-reporting company, a non-affiliate can sell freely once the one-year holding period has passed.

That is why the exam distinguishes so carefully between affiliates and non-affiliates. The same restricted shares carry very different rules depending on who owns them.

Rule 144A and Qualified Institutional Buyers

Rule 144A is a separate safe harbor that lets holders resell restricted securities to qualified institutional buyers, or QIBs, without waiting for a holding period. A QIB is generally an institution that owns and invests at least $100 million in securities of unaffiliated issuers, with a higher threshold for banks and a lower one for registered broker-dealers.

Rule 144A created a large institutional market for privately placed debt and equity. Retail investors cannot buy in that market, because it is limited to QIBs.

On the exams, remember the difference: Rule 144 governs public resales of restricted and control stock, while Rule 144A governs private resales to large institutions.

Comparing Control and Restricted Stock

The table below summarizes how Rule 144 applies in each case.

Worked Example: The Volume Limit

A director of a listed company wants to sell shares. The company has 20 million shares outstanding, and the average weekly trading volume over the past four weeks was 180,000 shares.

One percent of outstanding shares is 200,000. Because the volume limit is the greater of the two measures, the director can sell up to 200,000 shares in the next three months.

If the average weekly volume had been 250,000 shares, the limit would be 250,000. Because the sale exceeds 5,000 shares, the director must also file Form 144 and sell through ordinary brokers’ transactions.

Worked Example: A Private Placement Investor

An investor who is not an affiliate buys shares in a private placement by a company that has been reporting to the SEC for several years. Seven months later, they want to sell.

The six-month holding period has passed, so they can sell, provided the company is current in its SEC filings. They face no volume limit, no manner-of-sale requirement and no Form 144 filing.

If the same investor waits until a full year has passed, they can sell with no conditions at all. If the investor were a director of the company, they would also have to meet the volume limit, manner-of-sale and Form 144 requirements every time they sold.

Client Scenario: An Executive Diversifying

An investment adviser representative’s client is the chief financial officer of a listed company, and more than half of their wealth is in company stock, some bought on the open market and some received in a private transaction 18 months ago. The client wants to diversify.

All of the shares are control securities, because the client is an affiliate. The open-market shares have no holding period, and the privately acquired shares have passed the six-month holding period, but every sale must still meet the volume limit, manner-of-sale and Form 144 requirements, along with the company’s own trading windows and insider trading rules.

The adviser should coordinate with the company’s legal team, consider a planned selling program and address the concentration risk in the client’s portfolio. As a fiduciary, the adviser must put the client’s interests first; FRC’s guide to fiduciary standard vs suitability standard explains what that duty requires.

The Exam Traps

The first trap is mixing up the two labels. Restricted describes how the stock was acquired; control describes who holds it. Control stock bought on the open market is not restricted.

The second trap is the holding period. It applies only to restricted securities, and it is six months for reporting companies and one year for non-reporting companies.

The third trap is the volume limit, which is the greater, not the lesser, of 1% of outstanding shares or the four-week average weekly volume, and applies only to affiliates. The fourth trap is Form 144, which is required only above 5,000 shares or $50,000 in a three-month period.

A Memory Aid

Remember “restricted is how, control is who.” Restricted stock came in through a private door; control stock is in the hands of an insider.

For the numbers, remember 6, 12, 1, 4, 3 and 5,000 or 50,000: six months or one year to hold, 1% or four weeks of volume, measured over three months, and Form 144 above 5,000 shares or $50,000.

Practice Questions

Question one: a director buys 10,000 shares of their company on the stock exchange. Are the shares restricted, control or both? They are control securities but not restricted, because they were bought in the public market by an affiliate.

Question two: what is the holding period for restricted securities of a company that has reported to the SEC for two years? Six months.

Question three: a company has 50 million shares outstanding and an average weekly trading volume of 400,000 shares. What is an affiliate’s maximum sale under Rule 144 in a three-month period? 500,000 shares, because 1% of outstanding shares is greater than the four-week average weekly volume.

Question four: when must an affiliate file Form 144? When they plan to sell more than 5,000 shares, or shares worth more than $50,000, in any three-month period.

Question five: a non-affiliate has held restricted shares of a reporting company for 14 months. What conditions apply if they sell? None, because non-affiliates can sell freely after one year.

Related Questions

Rule 144 connects closely to several other topics on the exams. FRC’s guide to Regulation D Rule 504 vs Rule 506 explains the private placements that create most restricted securities, and the guide to common stock vs preferred stock covers the shareholder rights that come with the shares themselves.

Together, they give you a complete picture of how securities are issued privately, who holds them and when they can reach the public market.

Get Exam-Ready

Rule 144 is among the most dependable marks on the exams once the holding periods, volume limits and affiliate rules are clear. The FRC Series 65 playlist linked at the top of this guide covers every exam section, with the traps to look out for in each one.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any rule and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE, the Series 7 or all three, structured exam preparation turns topics like Rule 144 into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

Restricted stock is acquired in an unregistered sale and must meet a holding period before it can be resold publicly. Control stock is held by an affiliate and is subject to Rule 144’s volume, manner-of-sale and filing conditions however it was acquired.

Master the difference between how and who, the holding periods and the affiliate volume limit, and you will be ready for every version of this question the exam can ask.