Find out how restricted US shares work, how to tell if it is a scam, what you can do to protect yourself and what to do if you have been scammed.
Many reports we receive about share scams or boiler rooms involve the sale of restricted or controlled US shares. While the sale of these shares is not always a scam, it is often not made clear to investors that they can be very difficult or expensive to trade.
Restricted or controlled shares are also known as ‘Regulation S shares’. This comes from a US ruling that allows firms there to sell stocks that do not meet listings standards (and therefore have tight restrictions on their sale in the US) to investors outside the US.
These shares are often issued at a discount to their normal US price, but most of this discount is kept by the broker.
How restricted US shares work
If you buy these shares you will have to keep them for a set period, usually six months or one year. You cannot sell them back to buyers in the US during this time without paying to lift the restriction.
Once the holding period has passed you still have to pay a US lawyer to remove the legal restriction from the share certificate before selling the shares, which could cost more than your shares are worth.
For this reason, investors holding restricted or controlled shares are often targeted by fraudsters that offer to get the restriction removed or say they will minimise the loss on the investment. But this is often a scam run from a boiler room and you are unlikely to ever receive the money from the sale of the shares.
Find out more about share fraud and boiler rooms.
We strongly advise you to only deal with financial services firms that are authorised by us, and check the Register to ensure they are. Keep in mind that authorised firms are unlikely to contact you out of the blue with an offer to buy or sell shares.
Make sure you understand any investment product being promoted to you before you part with your money, and in this case ensure you know how you can sell the shares. The US Securities and Exchange Commission (SEC), the US financial services regulator, has further information on this.
If you have been scammed
If you have already bought restricted or controlled shares, you generally have three options:
1. Pay a US lawyer to have the restrictions lifted
This will make the shares tradable but is also likely to involve an administrative fee.
2. Wait for the six month or one-year holding period to end
The restriction will then be lifted and the shares may become tradable. However, there is no guarantee your shares will have held their value by the end of this period. If you purchased them from an unauthorised broker it is likely they will have little or no value.
3. Arrange for a private sale of your stock
It will be difficult for you to sell the shares privately before the restriction has lapsed.
As restricted shares cannot be traded in the US whilst the restriction is in place, you will be faced with a limited market. Authorised UK brokers are also unlikely to be able to assist you with arranging a sale or giving you advice about restricted shares.
Find out more about reporting a scam.