Stock Transfer Restrictions and Rights

ROFR and Co-sale

These two mechanisms give the company some control over who owns its stock. If executives want to limit the sale of shares, they can invoke a right of first refusal (ROFR), which allows the company first, and current investors next, to match or top the outside offer and purchase the shares. A co-sale right allows the company first and then the current investors to sell a pro rata portion of their preferred shares to the outside investor at the same terms offered to the seller of common shares.

Regulation D, Rule 501

This sets out the definitions used in Regulation D, which allows sellers of restricted stock to sell such shares to accredited investors.

Rule 144

Rule 144 allows sellers of restricted stock to resell exercised shares if held for at least one year after the exercise date. It also allows buyers to purchase restricted stock once they have received financial performance information from the company.

Section 4(2)

This provides an exemption from registration requirements of restricted securities if sold to an accredited investor.

Preemptive Rights

Preemptive rights refer to a shareholder’s rights to purchase a company’s new shares. This occurs on a pro-rata basis in proportion to the respective ownership percentages of all shareholders before the new shares are offered to anyone else. Rights can be transferred between sellers and buyers in an employee liquidity program, but any such transfer must be explicitly documented.