Legend on restricted securities

Under National Instrument 45-102, the first trade of shares distributed under the prospectus exemptions listed in its appendices is subject to resale conditions. For the restricted period in section 2.5, the legend is how those conditions travel with the paper. A buyer who takes shares as part of a deal, or an investor in a small company’s raise, can check the certificate, or the written notice for book-entry shares, for it.

What the instrument requires

Under section 2.5 of National Instrument 45-102, a first trade is a distribution unless the conditions in subsection (2) are met, subject to subsection (3). For securities distributed on or after the date that section names, one condition is that the certificate, if any, carries a legend. The wording differs depending on whether the issuer was a reporting issuer on the distribution date. If the security sits in a direct registration or other electronic book-entry system, or the purchaser did not directly receive a certificate, the purchaser must have received written notice containing the legend restriction notation. Section 2.1 says section 2.5 does not apply in Manitoba.

What to check or ask

• Does each certificate carry the legend, and is the date in it worked out from the distribution date as section 2.5 sets out?
• Is the issuer a reporting issuer? The Alberta Securities Commission says restrictions on a non-reporting issuer’s securities continue indefinitely unless the issuer becomes a reporting issuer.
• Is there a transfer restriction in the articles or a shareholder agreement as well?

See the hold period and should I bring in a partner or investor instead of selling. This entry covers the national instrument as published by the Ontario Securities Commission; check the rules where you are.