Legends on Warrant Certificates

Just in case you’re jumping the gun and learning about legends before warrant certificates, here is a little refresh.

Warrant certificates are options issued by exchanges to investors. Most warrant certificates are issued for small-cap companies, rather than the large-cap companies of the world (think Papa John’s Pizza not Microsoft). Warrant certificates include securities in the form of equity for the company and most of the time, these certificates are tied in with financings and common shares.

Great, now that you understand what a warrant certificate is, you can dive into understanding what a legend on a warrant certificate is.

What is a Legend?

You know how they say that there is “no such thing as a free lunch”? The same goes for warrant certificates. A legend on a warrant certificate includes the restrictions that are present once an investor owns a warrant certificate—essentially, the fine print of the certificate. And like most contracts you sign, there are rules and regulations. For warrant certificates, the legend outlines these restrictions.

Legends can be found on warrant certificates and warrant shares in both the United States and Canada. The legends include language giving the rundown of the following terms:

  • Who the warrant certificate can be sold, transferred, or offered to
    • For example, if you purchased the certificate from Company A, you may only be allowed to sell the certificate back to Company A
  • Where the warrant certificate can be sold, transferred, or offered to
    • If you purchase the certificate outside/inside of the United States, you may only be allowed to sell it back in the same origin country
  • When you are allowed to sell, transfer, or offer the stock back to the company

For small-cap and privately-owned companies, there may be additional guidelines beyond who, where, and when, such as limitations on selling and transferring the shares. These added restrictions are put in place to limit who is able to become a shareholder.

Where to Find a Legend

Warrant certificates are not the right place to quickly skim and check off random boxes agreeing to the “terms and conditions”—you know who you are. It’s essential to read the full legend on a warrant certificate or else the unread terms may prevent you from making money.

Most of the time, legends are placed directly in the warrant certificate agreement and they need to be signed prior to purchasing. Other times, a separate document will be given to the investor which describes the certificate’s restrictions. The legend will be labeled as such with similar wording: “…person or to any person upon exercise of this Warrant Certificate will have the following legend endorsed”.

What to Look For to Make Money

With any type of stock option that you own, knowing when you can sell it to actually make money is the key to, well, making money. When purchasing a warrant certificate, reading the fine print—the legend—prior to signing your name on the dotted line will help you understand when you can sell your warrant certificate to (hopefully) make a big buck.

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