Unregistered Shares Definition

What are unregistered shares?

Non-registered shares, also called limited stock, are securities that are not registered with the Securities and Exchange Commission (SEC). They are usually issued through private placements, Regulation D offers or plans for employee stock ownership in compensation for professional services or in exchange for financing a start-up.

For example, a private company may issue non-registered shares to its officers and board members as part of their overall compensation.

Key points to remember

  • Unregistered shares are any form of corporate stock that does not have an effective registration statement on file with the SEC.
  • Non-registered stocks offer fewer investor protections and pose higher risks, so certain criteria, such as being a high-income investor, are usually required for these stocks to be sold by a company.
  • Investors can avoid falling victim to unregistered securities scams by researching whether a particular security is registered in the SEC’s EDGAR online database.

Understanding Unrecorded Actions

Non-registered shares have fewer investor protections and present different types of risks than nominative titles. Therefore, companies can only sell unregistered shares to “accredited investors”.

To be considered an “accredited investor”, you must be a individual high net worth (HNWI) or a high income investor. Who qualifies as an HNWI differs by financial institution, but you generally need to have six- to seven-figure liquid assets. A high-income investor typically has an income of at least $200,000 per year or at least $300,000 per year for married couples.

In the past, it was prohibited to solicit or advertise non-registered shares. However, in 2013, the SEC passed Rule 506(c) under the Jumpstart Our Business Startups (JOBS) Act, permitting the solicitation and advertising of certain unregistered securities.

Selling unregistered shares is generally considered a crime, but there are exceptions to this rule. SECOND Rule 144 specifies the conditions under which pure registered shares may be transferred:

  • They must be kept for a prescribed period.
  • There must be adequate public information about the historical performance of the security.
  • The sale must be less than 1% of outstanding shares and less than 1% of the average trading volume of the previous four weeks.
  • All normal commercial terms that apply to any transaction must be met.
  • Sales of more than 5,000 shares or more than $50,000 worth of shares must be pre-registered with the SEC. An exception to this condition occurs if the seller is not associated with the company that issued the non-registered shares (and has not been associated with it for at least three months) and has held the shares for more than one year.

Unregistered Stock Scams

Sometimes investors can be exploited through unregistered securities scams. These scams usually advertise the sales as private offers with little or no risk and high returns.

The SEC recommends that investors 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
  • No net worth or income requirements
  • Only one seller seems to be involved
  • Dummy or virtual offices
  • The company is not in good standing or is not listed
  • Unsolicited investment offers
  • Suspicious or unverifiable biographies of management or promoters

Investors can also find out if a particular security is registered by searching for it in the Edgar online database. The stocks traded by the average investor will all be recorded in the database.