What Does it Mean for Shares to Lapse?

Restricted stock provides free wealth, once restrictions lapse.

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Shares of a public company can trade freely on stock exchanges and via broker/dealers. However, some company shares can be restricted from public trading, either due to government regulations or company policies. Eventually, these restrictions lift, or lapse, and the shares can trade publicly. To be clear, it is the restrictions, not the shares, that lapse.


A lapse is defined as a period of time in which individuals who have received corporate shares as part of an employee incentive cannot sell them or buy more.

Understanding Government Restrictions

A company is private if it hasn’t yet participated in an initial public offering (IPO). An IPO requires the company register its shares with the U.S. Securities and Exchange Commission. A private company can sell or issue unregistered shares through a procedure called a private placement. Private companies must have earned an exemption from the SEC registration requirements to sell unregistered shares. The stock certificates for these private shares are stamped with a legend alerting buyers that they can’t resell the shares unless the legend is removed.

Exploring Rule 144

SEC Rule 144 governs how the trading restrictions on unregistered shares can lapse, allowing the shares to be publicly traded. The rule specifies a series of conditions that must be satisfied before the restrictive legend on unregistered shares can be removed. The principal condition is a holding period, which ranges from six months to one year, depending on whether the company meets certain reporting standards. Additional conditions apply to restricted shares held by “affiliates,” who are employees, directors and others who are associated with the company. Once the conditions are met, the share restrictive legends can be removed.

Stock Benefit Programs

Another type of trading restriction can apply to public shares issued to employees through stock option plans and other compensation programs. These shares have restrictions imposed by the issuing company rather than the SEC and are typically not stamped with a restrictive legend. Certain conditions must be met before the trading restrictions on these employee shares can be lifted.

Lapsing of Employee Share Restrictions

The issuing company sets the rules governing when the restrictions on employee-benefit shares lapse. A common condition, called vesting, specifies how long an employee must work for the company before the restrictions lapse. Vesting may occur in installments over several years. Other conditions governing restrictions on these shares might deal with the company reaching specified milestones for earnings or other financial goals.

Some plans call for restrictions to lapse if the company is acquired by another company and the employee is terminated due to the acquisition. Finally, employee shares might be temporarily restricted, or “locked up,” when a private company undergoes an IPO. The restrictions lapse after a specified period following the completion of the IPO.