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
What Are 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 meaning of unregistered shares? ›
Before securities—like stocks, bonds, and notes—can be offered for sale to the public, they first must be registered with the Securities and Exchange Commission (SEC). Any stock that does not have an effective registration statement on file with the SEC is considered "unregistered."
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 are examples of unregistered securities? ›
The most common unregistered offerings to institutions in capital markets include: traditional private placements of debt or equity securities sold to a limited number of institutional investors under Section 4(a)(2) or Regulation D; Rule 144A offerings of eligible debt or equity securities to large institutional ...
What happens if you 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.
Can unregistered shares be sold? ›
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.
What is a non-registered shareholder? ›
More Definitions of Non-Registered Shareholders
Non-Registered Shareholders means shareholders who do not hold common shares in their own name and “Intermediaries” refers to brokers, investment firms, clearing houses and similar entities that own securities on behalf of Non‐Registered Shareholders.
What is the penalty for unregistered securities? ›
Section 5 prohibits the sale of unregistered securities. See 15 USC 77e. The penalty is a maximum of five years federal prison.
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 unregistered securities be transferred? ›
Transferring securities
Transfers of unregistered securities, either as outright gifts or to trusts or other estate planning vehicles, can raise securities law issues. For example, if you gift restricted securities to a child or other family member, the recipient may not be able to sell the shares freely.
In general, all securities offered in the United States must be registered with the SEC or must qualify for an exemption from the registration requirements.
Can you tell me that these are not unregistered securities? ›
Moskowitz said that unlike investors such as Tom Brady, Gisele Bündchen, Larry David, and Shaquille O'Neal, Swift did her homework. He quoted a specific question he claimed she asked: “'Can you tell me that these are not unregistered securities?” Her prospective endorsem*nt deal never happened.
Is bitcoin unregistered security? ›
If a cryptocurrency meets the criteria to be an investment contract, the SEC requires it to be registered as an investment. It will therefore come under SEC regulation. If it is offered to institutional investors, it is considered an investment contract and must also be registered.
Why do securities need to be registered? ›
Purpose of Registration
This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities. While the SEC requires that the information provided be accurate, it does not guarantee it.
Can accredited investors buy unregistered securities? ›
Accredited investors are allowed to buy and invest in unregistered securities as long as they satisfy one (or more) requirements regarding income, net worth, asset size, governance status, or professional experience.
What is the difference between registered and unregistered block? ›
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.
What does it mean for shares to be registered? ›
A registered share is a share issued in the owner's name. If the owner later sells the share, the new owner must register it in their name.
What happens when a stock is deregistered? ›
Delisted shares refer to the shares of a listed company that have been removed from the stock exchange permanently for buying and selling purposes. That means delisted shares will no longer be traded on the stock exchanges – National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
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.
