What Are Unregistered Shares?
Unregistered shares, also known as restricted stock, are securities that are not registered with the Securities and Exchange Commission(SEC). Theyare usually issued through private placements, Regulation D offerings, or employee stock benefit plans as compensation for professional services, or in exchange for funding a startup company.
For example, a privately-held company might issue unregistered shares to its executives and board members as part of their compensation package.
Key Takeaways
- Unregistered shares are any form of company stock that does not have an effective registration statement on file with the SEC.
- Unregistered shares have fewer investor protections and pose higher risks so certain criteria—for example, being a high-income investor—are usually required in order to be sold these shares by a company.
- Investors can prevent being taken advantage of through unregistered securities scams by looking up if a particular security is registered in the SEC’s EDGAR database online.
Understanding Unregistered Shares
Unregistered shares have fewer investor protections and pose different kinds of risks than registered securities.As a result, companies can only sell unregistered shares to "qualified investors."
To be considered a "qualified investor," you must be a high-net-worth individual (HNWI) or a high-income investor. Who qualifies as an HNWI differs by the financial institution, but typically you must have liquid assets that range from six to seven figures. A high-income investor typically has an income of at least $200,000 per yearor at least $300,000 per yearfor married couples.
In the past, soliciting or advertising unregistered shares was prohibited. However, in 2013 the SEC adopted Rule 506(c) as part of the Jumpstart Our Business Startups (JOBS) Act, allowing certain unregistered securities to be solicited and advertised.
Selling unregistered shares is typically considered a felony, but there are exceptions to this rule. SEC Rule 144 lays out the conditions under which unregistered shares may be sold:
- They must be held for a prescribed period.
- There must be adequate public information about the security’s historical performance.
- The sale must be of less than 1%of shares outstanding and less than 1%of the previous four weeks’ average trading volume.
- All normal trading conditions that apply to any trade must be met.
- Sales of more than 5,000 shares or more than $50,000 worth of shares must be preregistered with the SEC. An exception to thiscondition occurs if the seller is not associated with the company that issued the unregistered shares (and has not been associated with it for at least three months) and has owned the shares for more than one year.
Unregistered StockScams
Sometimes investors can be taken advantage of through unregistered securities scams. These scams usually advertise the sales as private offerings with little to no risk plus high returns.
The SEC recommends thatinvestors should be on the lookout for some of these common signs of potential fraud when considering investing in an unregistered offering:
- Claims of high returns with little or no risk
- Unregistered investment professionals
- Aggressive sales tactics
- Problems with sales documents
- Norequirements onnet 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 the promoters
Investors can also find out if a particular security is registered by looking it up in the SEC’s EDGAR database online. Stocks traded by the average investor will all be registered in the database.
FAQs
Unregistered shares are securities that are not registered with the SEC. This means that they are not subject to the same disclosure and reporting requirements as registered shares. Unregistered shares are typically sold through private placements, which are offerings that are exempt from SEC registration requirements.
What is the meaning of unregistered shares? ›
Unregistered shares, also known as restricted stock, are securities that are not registered with the Securities and Exchange Commission (SEC).
What is the risk with unregistered securities? ›
Unregistered persons who sell securities perpetrate many of the securities frauds that target retail investors. Always check whether the person offering to sell you an investment is registered and properly licensed, even if you know him or her personally.
What is the difference between registered and unregistered stocks? ›
Stock can only be sold in the market if it is registered or is exempt from registration. Companies can, however, sell securities in private sales or placements (including to venture capital investors). These are unregistered and have to follow a set of rules if they are offered for resale.
What is an example of an unregistered security? ›
Examples include: a company's issuances of equity to its founders or a start-up company obtaining venture capital financing or just emerging from the venture capital stage. Debt private placements are done by both public and private companies.
Are unregistered shares restricted? ›
Restricted securities refer to securities obtained from an issuing company or its affiliate through unregistered or private sales, such as: Private placements.
Why do shares need to be registered? ›
The shareholder register serves as proof of ownership in the company, and it shows the number of shareholders in each class of shares. Companies use the shareholder register to keep track of shares held by shareholders and contact them directly instead of going through a custodian bank.
Is it illegal to buy unregistered securities? ›
Though a purchaser of unregistered securities most likely would not be guilty of a crime, the fact that an issuer should have registered, but didn't do so, should give potential investors a moment of pause. Failure to register may be an indicator of fraudulent intent or management incompetence.
How do I report unregistered securities? ›
Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at Help@SEC.gov . Visit Investor.gov, the SEC's website for individual investors and finra.org/investors , FINRA's website for individual investors.
Can securities be sold without registration? ›
Broker-Dealers Must Register Before Selling Unregistered Securities – Including Private Placements (or Regulation D offerings) A security sold in a transaction that is exempt from registration under the Securities Act of 1933 (the "1933 Act") is not necessarily an "exempted security" under the Exchange Act.
Section 5 prohibits the sale of unregistered securities. See 15 USC 77e. The penalty is a maximum of five years federal prison.
What does unregistered investment mean? ›
A non-registered account is an investment account that does not receive special tax treatment. Investment gains such as interest, dividends, fund distributions and capital gains from asset sales are taxable at your marginal tax rate in the year they occur.
How do non-registered investments work? ›
Investments in a non-registered account can earn interest or dividend income that is taxed as it is earned or generate capital gains that are taxed as they are realized. This investment income is taxed as it is earned or realized, but withdrawals are not.
Can you tell me these are not unregistered securities? ›
"In our discovery, Taylor Swift actually asked them: 'Can you tell me that these are not unregistered securities?' " Moskowitz said. A security is a tradeable asset that holds value, like a stock or a bond.
What securities are exempt from registration? ›
The most common exemptions from the registration requirements include: Private offerings to a limited number of persons or institutions; Offerings of limited size; Intrastate offerings; and.
What is an unregistered block trade? ›
A “registered block” requires registration of the shares under the Securities Act, whereas an “unregistered block” does not have to be registered under the Securities Act, because the shares were previously registered or there is an applicable registration exemption.
Is it illegal to buy an unregistered security? ›
Though a purchaser of unregistered securities most likely would not be guilty of a crime, the fact that an issuer should have registered, but didn't do so, should give potential investors a moment of pause. Failure to register may be an indicator of fraudulent intent or management incompetence.
What is a non registered shareholder? ›
Non-Registered Shareholders means Shareholders that do not hold their Common Shares in their own name and whose Common Shares are held through an Intermediary.
What is the difference between registered and unregistered block trades? ›
A “registered block” requires registration of the shares under the Securities Act, whereas an “unregistered block” does not have to be registered under the Securities Act, because the shares were previously registered or there is an applicable registration exemption.
