Introduction to electronic shares
When you imagine a share of a company, what do think of? For some, images of a large stock certificate bearing the company name appear. Unfortunately certificated paper stock, or certificated shares, are quickly becoming something of the past.
If you have traded shares on the stock market or have a brokerage account, you probably already know that most trading on the market is no longer done by paper stock certificates. With the advent of the internet and trading of shares on a large scale, paper stocks have all but become obsolete, making way for company shares to move to digital, uncertificated shares.
Electronic shares are company shares that have been issued electronically, and do not exist in paper form. With nearly everything being on the internet these days, companies have also moved towards digitalization with the advantages and convenience of electronic shares.
In general, there are three ways to issue paperless shares:
- Certificated shares signed digitally (PDF)
- Uncertificated shares on a spreadsheet
- Uncertificated shares using an online ledger
Some may believe that a company can only issue electronic shares in one way. However, there are many ways that a company can issue shares. Each one is a bit different, and serves different purposes for the company.
But what are certificated, uncertificated, and electronic shares, and how can you take advantage of making the move to paperless?
What Are Electronic or Digital shares?
Electronic shares or digital shares are shares that are represented in some form on an electronic stock ledger. These have the same properties as paper shares, just that they are recorded only in electronic form. There are no major differences with electronic and paper stocks, just one is in paper form and the other is not. The company can still issue all the various forms of its shares electronically.
All the following types of equity can be stored as digital shares:
- Common stock
- Preferred stock
- Convertible notes (debt that can convert into equity)
- Restricted units
- Restricted stock units
- Other forms of securities as well.
Recent technological advances have led to more and more companies issuing electronic shares.
Companies must however notify the shareholders of any changes in the shareholdings of the company and also keep a record of the updated shareholder list. With electronic shares, this can be achieved seamlessly all online with notifications to shareholders via email; greatly reducing the time and cost needed to keep the cap table of a company up to date.
Now that you know the difference between paper stocks and electronic shares, let’s dive further into two important terms for shares: certificated shares and uncertificated shares.
Certificated Shares & Uncertificated Shares
Shares for a company can exist in two forms, certificated and uncertificated shares.
- Certificated shares are stocks of a company represented on a paper stock certificate. The owner of this paper certificate would have evidence of ownership of the company.
- Uncertificated shares are shares that are tracked and represented in the books of a company. These shares are recorded in the company as a “book entry”, and are not represented with a paper certificate. The shareholders would be updated of their ownership by the company, the company’s transfer agent/broker with an account statement or updates on their system.
Drawbacks of Paper Stock Certificates
Within the past few decades, companies have slowly moved things into the digital world. Not only are paper certificates less convenient for companies, but it’s also more expensive. These are just a few examples of the drawbacks of paper stock certificates:
They can be easily lost or stolen
When you have a paper stock certificate, you would have to store it somewhere. And with all the other documents that you have printed on paper, you can misplace it and lose proof that you or a shareholder owns a part of the company. This in turn can become a legal case and cost you more than you can imagine.
It’s hard to track and manage the certificates
The paper stock certificates may not be available all in one place which is why tracking them is not easy, at times impossible. Moreover, with many investments and shares, there are chances where you can forget or miss one or two of the certificated shares that have been given from your company. This may make things difficult, and cost you in the end.
They can be transferred to another shareholder without your knowledge
When a shareholder doesn’t want to hold a share of your company any more, they can easily sell off the shares to someone in the market without your consent. In short, the transfer would not be on the records of your company.
More difficult to audit
If the paper stock certificates are not centralized, it may be difficult to track them down for the process of auditing. It may also be very easy for the paper stock certificates to become inaccurate. Auditing should be straightforward where you can view the register to note all the details of the company. With paper stock certificates, it may not be possible, while with uncertificated shares, it becomes easier to audit the company transactions.
A lot of public companies have been issuing uncertificated shares for many years now, and there is a recent trend towards eliminating paper certificates altogether. Even though this may be true, there are still many non-LLC private companies that tend to issue stock by using paper certificates. In addition to this, web-based systems are now offering private companies with much less expensive and more accessible options. Thus paper stocks are swiftly turning into something of the past.
Benefits of uncertificated shares
But why exactly is there an emphasis on “uncertificated” shares and what are the benefits?
No More Certificate Trouble
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At first, you would not need any stock certificate forms, where you require signatures for proof of receipt. Alternatively, you can just email the shareholder the relevant details of the issuance and the company in a notice form. In case the shareholder needs any additional information, they can easily request for the same online.
With this, all you would need is an accurate method for keeping track of each issued share. You would not need to send around certificates to get all the shareholders to sign. This would also reduce the probability of disputes, with the help of the online platform.
Switching Over is Easy
Another great thing is that you can change to uncertificated shares without additional work for the existing certificates. Even though it might be helpful if everyone turns in their old certificates to get the new uncertificated shares, it is not necessary. You would however need to issue a resolution of directors to allow the company to start recording the shares electronically.
In short, if you do not want to track all the shareholders down, you do not need to. You can keep a track of all the uncertificated shares along with the existing certificates in the same system.
Enables Businesses to Act As Their Own Transfer Agent
A shareholder cannot just transfer or sell the certificated shares without the knowledge of the company. This is because there aren’t any physical certificates which can be sold. The ledger of the company is the official copy of all the outstanding shares. Hence, for executing a legal transaction, the shareholder would have to consult with the company in a formal procedure where it would be recorded properly.
And with this, the company would not have to hire and pay someone for the transfer process and can act as their own transfer agents.
Control With Software
With the help of proper software, each transaction can be easily documented, and verified in an indisputable and electronic manner. Each shareholder would have access to the details. This can be done with a simple spreadsheet, but it may be more confusing and is not suggested.The reason is simple; it would not meet the standards of accessibility, speed, accuracy, security and so on.
Now that we are clear about the benefits of uncertificated shares along with the drawbacks of certificated shares, let us understand how to issue electronic shares in a company.
How to issue Electronic Shares for your Company?
There are three main ways that a company can issue electronic shares. Electronic shares, uncertificated shares using a spreadsheet and uncertificated shares using an online software or ledger.
Electronic certificated shares
Electronic shares are similar to certificated paper stocks with one main difference, in that they exist only in electronic documents, such as PDFs. This means rather than storing all the paper stocks in some locker or storage bin, they are kept in a secure server somewhere for the company. This allows more flexibility for the company, as it is easier to move around the shares and keep track of a higher volume of shares with a list of shareholders.
However, there are a few drawbacks to this method of keeping shares in electronic form.
First, the legal classification for these shares are not well established. This relatively new take on holding shares has not been completely accepted by the courts, thus making these not the securist form of holding shares in a company.
The second drawback is that because of the legal issues surrounding these types of shares, they may need to comply with the requirements of both certificated and uncertificated shares, which could cause further strain on the company and shareholders.
The last drawback is that using this form of shares for the company means that the company must first gather all the paper stock certificates and convert them to electronic shares, which can be time consuming and difficult to do. This last reason may cause some owners to avoid this type of shares for a company, especially if the company is a larger corporation with numerous shareholders.
Uncertificated Shares using a spreadsheet
This form of shareholding requires the company to track all the shares on a spreadsheet or ledger, which would become the official record of ownership in the company. Possibly a long time ago companies used to do this on a paper ledger, but now most companies keep all of this information on an Excel spreadsheet.
In addition to this, many companies have opted for this centralized method of recording shares as its cost effective and is easy to manage, especially for smaller companies. With a little legal help from an attorney to certify the authenticity and existence of these shares, a company is able to keep all the records on this ledger. Companies have been doing this type of share record keeping for decades, so it is already well established in law and in the courts.
With these in mind, companies have found that there are many restrictions to this as well. It’s hard to track a large amount of data with these spreadsheets, and keeping everything up to date with many shareholders is challenging. Try sharing and keeping a file up to date with 50 different shareholders at one time, good luck! Also the access to these files are hard to manage, and these inconveniences has lead many to migrate their record keeping to a more share based, online software or ledger.
Uncertificated shares using online software or a ledger
The third and the best option is to issue uncertificated shares using web-based software that is designed just for this. Through this step, you would be able to enjoy the advantages of a spreadsheet like the flexibility between uncertificated and certificated shares, low implementation cost, along with the additional power of a specific web-based application like security.
The web-based application can have the sharing, accounting, automation and compliance tools that are built into the system. You would also have the feature to connect it with other devices and build things like electronic transactions, document storage, and so on. Even though most vendors might charge you for the software, you would be saving a lot more money that might have been lost over other alternatives.
Making the Move to Uncertificated Shares
Electronic uncertificated shares might not be for every business, but it can save you a lot of time and money. And which business wouldn’t not want this? The process of switching is quite easy and simple.
How to switch to uncertificated shares?
The process is straightforward, though it is recommended to have an attorney advise you before you take the first steps. And so that you know the basics of issuing the uncertificated shares, here are the steps involved:
- Step 1: Get authorization of the board of directors to start issuing uncertificated shares
- Step 2: Create a board resolution stating that the company has the authority to issue uncertificated shares.
- Step 3: After that, you would have to amend the company’s by-laws and articles of incorporation with the same effect.
- Step 4: At last you would be able to issue the uncertificated shares, and track everything electronically on the company’s ledger.
Ensure that you have an attorney advise you properly while you take these legal steps in your company. The requirements for switching may change state to state, so its best to clear everything up with your attorney before you move forward.
Future Potential of Uncertificated Shares and Distributed Ledger
Companies that have been using paper certificated shares are moving towards uncertificated shares and distributed ledger options as it makes the work easier and has reduced the cost to a high extent. Hence, as time passes, companies will give up the use of certificated shares and would move towards the paperless way.
This may take over to replace manual and inefficient processes, like the recording for shares and the issuing of certificated shares. With the continuous advancement in this technology, it will increase the efficiency and lower the costs as it does for web-based applications for uncertificated shares.
Nowadays, no one needs a fancy looking physical document that shows the ownership of a company. Instead, businessowners just wants to have a simple yet efficient way of issuing and keeping a track of all the shares in the company. This is so that the shareholders can have access to the respective and authorized information at all times.
And since the public market has already taken up the option of using uncertificated shares, it is time for private companies to do the same. With the help of Eqvista, you would be able to easily record all the shares issued and even transfer the existing certificated shares of your business.