What Are Unregistered Shares?
Let me explain unregistered shares to you directly: these are securities, also known as restricted stock, that aren't registered with the Securities and Exchange Commission (SEC). I see them issued mainly through private placements, Regulation D offerings, employee stock benefit plans as compensation for services, or in exchange for funding startups.
For instance, if you're running a privately-held company, you might issue these unregistered shares to your executives and board members as part of their pay package.
Key Takeaways
Here's what you need to know upfront: unregistered shares are any company stock without an effective SEC registration statement on file. They come with fewer protections for investors and higher risks, so companies can only sell them if you meet certain criteria, like being a high-income investor. To avoid scams with unregistered securities, I recommend you check if a security is registered in the SEC’s EDGAR database online.
Understanding Unregistered Shares
You should understand that unregistered shares offer fewer protections and different risks compared to registered securities, which is why companies limit sales to 'qualified investors.' To qualify, you need to be a high-net-worth individual (HNWI) or have high income—HNWI typically means liquid assets in the six to seven figures, varying by institution, while high-income means at least $200,000 annually or $300,000 for married couples.
In the past, you couldn't solicit or advertise unregistered shares, but that changed in 2013 when the SEC adopted Rule 506(c) under the JOBS Act, allowing solicitation and advertising for certain ones.
Selling these shares is usually a felony, but exceptions exist under SEC Rule 144, which requires holding them for a set period, having adequate public info on the security’s history, limiting the sale to under 1% of outstanding shares and under 1% of the prior four weeks’ average volume, meeting normal trading conditions, and preregistering sales over 5,000 shares or $50,000—unless you're not affiliated with the issuer for at least three months and have held the shares for over a year.
Unregistered Stock Scams
Be aware that scams involving unregistered securities can take advantage of investors, often promoting them as private offerings with high returns and no risk.
Common Signs of Potential Fraud in Unregistered Offerings
- Claims of high returns with little or no risk
- Unregistered investment professionals
- Aggressive sales tactics
- Problems with sales documents
- No requirements on net worth or income
- Only a salesperson seems to be involved
- Sham or virtual offices
- The company is not in good standing or not listed
- Unsolicited investment offers
- Suspicious or unverifiable biographies of management or promoters
Protecting Yourself
To protect yourself, look up the security in the SEC’s EDGAR database online—stocks for average investors will be registered there.
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