Unregistered Shares: Meaning, Risks, and How to Protect Yourself

What are unregistered shares?

Unregistered shares—often called restricted stock—are company securities that are not registered with the U.S. Securities and Exchange Commission (SEC). They commonly arise from:

• Private placements or Regulation D offerings
• Employee stock plans or compensation packages
• Early-stage funding in startups

Because they lack an effective SEC registration statement, these shares carry different resale restrictions and fewer investor protections than registered securities.

Who can buy them?

Companies generally sell unregistered shares only to qualified or accredited investors. Common criteria for accredited investor status include:

• Net worth exceeding $1 million (typically excluding the primary residence), or
• Annual income of at least $200,000 individually or $300,000 jointly for the past two years.

Exact thresholds and definitions can vary by regulation and by issuer.

Key regulations and resale rules

• Rule 506(c) (part of the JOBS Act) permits certain unregistered offerings to use general solicitation and advertising, provided all purchasers are accredited investors and the issuer takes reasonable steps to verify that status.
• Rule 144 governs resale of restricted (unregistered) securities. Conditions for reliance on Rule 144 typically include:
• A required holding period before resale.
• Adequate public information about the issuer.
• Volume limitations (sales generally limited to a small percentage of outstanding shares or trading volume) and compliance with normal trading conditions.
• Filing Form 144 if the sale involves more than 5,000 shares or more than $50,000 in aggregate sales within a three-month period (subject to exemptions for non-affiliates who have held shares for more than one year).

Violating registration requirements can lead to civil or criminal enforcement actions; exemptions and resale rules should be carefully reviewed before transacting.

Common scams and red flags

Unregistered securities are sometimes used in frauds. Watch for these warning signs:

• Promises of high returns with little or no risk
• Unlicensed or unregistered investment professionals
• Aggressive, high-pressure sales tactics
• Poor or inconsistent sales documentation
• No net-worth or income requirements when investing in a supposed private offering
• Only a salesperson is visible; management or operations are opaque
• Sham or virtual offices, or a company not in good standing
• Unsolicited offers or unverifiable biographies of promoters

How to verify a security

• Check the SEC’s EDGAR database to see if a company or offering is registered. Publicly traded stocks and many registered offerings will appear in EDGAR.
• Confirm the issuer’s standing and review available financial disclosures before investing.
• For private offerings, request and review documents that support the exemption being claimed (e.g., Regulation D filings) and verify the seller’s authority.

Takeaways

• Unregistered shares can provide access to early-stage opportunities but carry greater risk and resale restrictions than registered securities.
• Typically available only to accredited or qualified investors and subject to specific SEC rules (e.g., Rule 506(c), Rule 144).
• Protect yourself by verifying registration/status through the SEC, scrutinizing offering materials, and watching for common fraud red flags. If unsure, consult a securities attorney or registered financial professional before investing.