Mythbuster: "Freely Tradable Shares"

The purpose of this post is to expose the myth that a person may own "freely tradable" shares of stock.  In truth, the term "freely tradable" is not used anywhere in state or federal securities laws for a simple reason - that concept does not exist under the law!

Every sale of stock in the United States is either (1) registered, (2) exempt from registration, or (3) illegal.  Generally, sales of stock may be registered, but not the shares of stock themselves.  Therefore, even if a person acquires stock in a registered offering, that person cannot "freely trade" those shares.  Each transaction in shares of stock must be individually evaluated to determine whether or not the shares can be further traded without registration.

Most open market sales of stock (such as buying or selling shares of stock traded on the New York Stock Exchange) are exempt from registration by virtue of Section 4(1) of the Securities Act of 1933, as amended, which exempts "transactions by any person other than an issuer, underwriter, or a dealer." 

The term "freely tradable" is often used to describe restricted securities which may be sold in accordance with Rule 144.  An explanation of Rule 144 is beyond the scope of this blog post, but it should be noted that compliance with Rule 144 can depend upon a number of factors, such as whether or not the seller is an affiliate of the issuer, the volume of recent sales made by the seller, whether or not the sales are made through a broker, whether or not current public information about the issuer exists, the length of time the seller has held the shares, etc.  Accordingly, it is very difficult to declare that any shares are "freely tradable."   One may be able to say that a particular sale may be made in compliance with Rule 144, however.