Gifting Restricted Units and Stripping the Legend
A customer holds $150,000 of units in a private, non-traded REIT bought 11 months ago through your firm. The unit certificate carries a restricted legend, and the operating agreement requires issuer consent plus an opinion of counsel for any transfer. The customer wants to transfer 25% of the units to his adult son as a gift and asks you to 'just get it done and strip the legend.' He also mentions a friend who might buy another 10% for cash. Your operations desk asks whether it can process the gift and remove the legend so the son can be listed on the register. The issuer's transfer agent is the issuer's own counsel.
1. May your operations desk process the gift and remove the restricted legend?
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No. Your firm is not the transfer agent and cannot override the issuer's transfer restrictions.
- The operating agreement conditions any transfer on issuer consent and an opinion of counsel. Those conditions apply to a gift as much as to a sale.
- Removing the legend is a separate act from recording the transfer. The legend reflects that the units were issued in a private transaction and have not been registered. Stripping it without a basis could facilitate an unregistered distribution and create Section 5 exposure.
- The correct process is to submit the transfer request to the issuer or its transfer agent, obtain written consent, and have the units re-registered in the son's name, ordinarily still bearing the legend.
Tell the customer what the issuer requires rather than promising a result the firm cannot deliver.
2. The customer asks why he cannot simply rely on Rule 144 because he has held the units for almost a year. How do you respond?
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Rule 144 is not a general permission slip, and the facts do not fit neatly.
- A gift is not a sale, so the Section 5 resale question is different from a cash sale; the issuer's contractual consent requirement still applies regardless.
- For the cash sale to the friend, Rule 144 has conditions - holding period, current public information about the issuer, and for affiliates, volume and manner-of-sale limits. A private, non-traded issuer typically has no public market and may not have current public information available, which can make 144 unavailable in practice.
- A private resale to a single buyer may instead rest on a private-placement-type exemption, which requires the issuer's cooperation, representations from the buyer, and usually an opinion of counsel.
Advise the customer to get the issuer's consent and counsel's view before anyone discusses price with the friend.
3. What records should the firm keep, and what should it not do?
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Keep the full trail:
- The customer's written transfer request and all correspondence about the gift and the potential cash sale.
- The issuer's consent, the transfer agent's instructions, and any opinion of counsel.
- The firm's internal escalation and the reasons for declining to remove the legend.
- The updated registration or ownership records once the transfer is completed.
Do not alter the customer's account records, backdate anything, or record a transfer that the issuer has not approved. The firm's books-and-records obligations require accurate records of the customer's positions and the instructions received; a convenience entry that anticipates issuer approval is both inaccurate and a supervisory red flag. If the customer disputes the outcome, the written record is the firm's defense.