| Purpose:
To establish the fair market value of restricted stock for
gift, estate or income tax purposes.
Rule 144 of The Securities Act of 1933 defines restricted
stock as “securities acquired directly or indirectly
from the issuer thereof, or from an affiliate of such issuer,
in a transaction or series of transactions not involving any
public offering.” Restricted stock can be awarded to
employees as compensation or it can be acquired through a
private transaction, such as a merger or acquisition.
Stock that is not registered with the Securities and Exchange
Commission may be sold to the public, subject to limitations
imposed by Rule 144. Generally, a person not affiliated with
the company can sell when the following conditions are met:
- The issuer has registered shares outstanding
and is current with its SEC filings;
- The seller files a Form 144, providing a
Notice of Intention To Sell, with the SEC at or prior to
the sale date;
- The seller has held the securities, fully
paid, for one year; and
- The maximum sale under each Form 144 filing
is greater of 1 percent of the outstanding shares of the
company or the weekly average trading volume during the
four weeks preceding the filing of the Form 144. This is
called the “dribble out” rule. (Persons affiliated
with the company do not face a one-year holding period,
but are always subject to the “dribble out”
rule.)
While non-restricted, publicly traded stock typically can
be sold and converted into cash in a matter of a few days,
restricted stock must be sold in private transactions, “dribbled
out” or held for a certain period. The limited liquidity
of the shares adversely affects their value and suggests that
discount from the publicly traded price should be applied
to establish their fair market value. The magnitude of the
discount is determined by evaluating the relevant facts in
each case, including the expected holding period, the availability
of a market following the holding period, the financial characteristics
of the company and economic conditions, among others. IRS
Revenue Rulings 59-60 and 77-287 provide specific guidance
on the factors to consider in valuing restricted stock.
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