What it means
Offering shares to the public generally requires a company to register the offer with the securities regulator, such as the Securities and Exchange Commission in the United States, and to publish detailed information. Registration protects investors but is slow and costly.
Companies can therefore sell shares without registration in limited situations, for example in a private placement to a small group of sophisticated investors. The shares sold this way are often called restricted securities.
The buyer typically signs a statement that the shares are bought for investment and not for immediate resale, and the share certificate or record carries a note about the restriction. The effect is that the shares cannot be sold to the public until they are registered or an exemption for resale applies.
A key condition is the holding period, which is a minimum time the investor must hold the shares before reselling. In the United States this is set by a rule for resale of restricted securities and can be as short as six months or as long as a year depending on the issuer.
The details differ between countries, so investors should always check with a lawyer before selling. Unregistered shares are common in start-ups, in employee equity awards and in pre-IPO (before the initial public offering) fundraising rounds.
Because they cannot be sold quickly, they are valued below equivalent freely traded shares, using a discount for the lack of liquidity. The phrase can also describe shares not yet entered in a particular holder's name on the company register, which is a different, administrative meaning.
For a finance team the practical points are the cap table (the list of who owns what), the disclosures needed when the shares are issued, and the value to put on the shares in the accounts. Mistakes in any of these can lead to regulatory problems, so companies keep careful records of each exemption they rely on.
In practice
Real-world examples.
Example
A biotech start-up raises $5,000,000 by selling shares directly to ten private investors under a private placement exemption. The shares are unregistered and carry a legend (a printed warning) about resale limits. The investors expect to sell only after the company lists or is bought.
Example
A senior engineer at a software company exercises stock options and receives shares that have not been registered for public sale. She must wait out the holding period before selling any of them, so she cannot raise cash from the shares immediately even though they show on her statement as worth $150,000.
Example
A listed manufacturer buys a smaller supplier and pays part of the price in its own shares. The shares are issued without registration, so the supplier's owners must hold them for a period before selling. The manufacturer records the shares at fair value and discloses the restriction.
Formula
Calculation
Value of restricted shares = quoted price x number of shares x (1 - liquidity discount)
Suppose a company has a quoted price of $20 per share for its freely traded stock. An investor holds 100,000 unregistered shares of the same class that cannot be sold publicly for a year. The unrestricted value is 20 x 100,000 = $2,000,000. A discount of 20% is applied for the restriction, so the discount is 2,000,000 x 0.20 = $400,000. Value of restricted shares = 2,000,000 - 400,000 = $1,600,000.Case study
Seen in the real world.
Northgate Robotics is an illustrative, fictional company preparing for a stock market listing in two years. It sold 1,000,000 shares at $12 each to a group of private investors, raising $12,000,000 without registering the offer.
The finance director kept a register showing each investor, the exemption relied on and the date the holding period would end. When a fund later asked to transfer some of its shares, the register showed immediately that the holding period was still running.
The illustrative lesson is that unregistered shares are perfectly normal, but they need record keeping and legal checks before anyone sells, otherwise the company and the seller can both be exposed to regulatory action.
Watch out
Common mistakes.
- Assuming that unregistered shares are illegal or fake, when they are often issued lawfully under a private placement exemption.
- Valuing the shares at the full quoted price of the freely traded stock, when the restriction on resale normally justifies a discount.
- Selling the shares as soon as the investor wants cash, without checking that the holding period and other conditions have been met.
Questions
People also ask.
Can unregistered shares become tradable?
Yes, they can be registered with the regulator or sold under a resale exemption once the conditions, including the holding period, have been met.
Are unregistered shares the same as shares with no certificate?
No, because registration here refers to the regulatory process for public offers, while certificates and share registers are record keeping tools.
Why do companies issue unregistered shares?
Because registration is slow and costly, and a private placement lets a company raise money quickly from a small group of investors.
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