What is a Non-Assessable Stock?
A non-assessable stock represents a class of stock where the issuing company cannot impose new levies on its shareholders for additional funds to make further investments. In essence, the maximum liability that a purchaser of the stock assumes remains equal to the initial purchase price of the shares. In the modern stock market, stocks issued by U.S. companies and traded on U.S. exchanges (as well as many others globally) are mostly non-assessable.
Key Insights
- Non-assessable shares don’t allow the issuer to demand more payment from stockholders beyond the initial buying price.
- Currently, the majority of shares in the market are non-assessable.
- In the past, especially in the 19th century, companies often issued assessable stocks at a discount, allowing the issuer to request more funds from shareholders later on.
How Non-Assessable Stocks Protect Your Investments
Unlike [assessable stocks], a now-obsolete method, non-assessable stocks offer added security and clarity to investors by preventing future financial obligations beyond the initial investment. Here’s a closer examination:
Historically, in the late 1800s, assessable stocks were quite prominent. Companies issued these types of equity, usually selling them at a discount, with understanding that the issuer would later levy assessments to collect additional funds from the existing shareholders. For example, a share with a face value of $20 might be sold for $5, but down the line, the issuer could request the shareholders to contribute the remaining $15. If investors refused, they would forfeit their stocks back to the company.
The market quickly grew wary of these practices, leading most companies to shift towards non-assessable stocks by the early 1900s. By the 1930s, the issuance of assessable shares had all but disappeared. This transition increased investor confidence as non-assessable stocks eliminated the risk of unforeseen financial demands from issuers.
Enhanced Security for Modern Investors
For any equity offering that is registered with the Securities and Exchange Commission (SEC), it is mandatory to include a law firm’s opinion verifying that the shares are “duly authorized, validly issued, fully paid, and non-assessable.” Hence, for non-assessable stocks, the primary financial commitment an investor makes lies in the initial purchase price of the shares. Although investors can lose their initial investment should the stock price drop to zero, they will never face additional financial requirements imposed by the issuing firm.
Additionally, in the unfortunate event of a company’s bankruptcy, non-assessable shares ensure shareholders only lose their original investment amount, protecting them from throwing good money after bad.
Example of a Non-Assessable Stock
Non-assessable stocks often explicitly state their non-assessability directly on the [stock certificate].
For illustration, take this vintage Pennsylvania Power & Light Company common stock certificate from 1973, containing the phrase “fully paid and non-assessable shares of the common stock without nominal or par value.” This standard phrasing signifies that shareholders cannot be asked to contribute additional funds beyond what they initially invested.
Related Terms: assessable stock, primary offering, stock certificate.
References
- U.S. Securities and Exchange Commission. “Bankruptcy: What Happens When Public Companies Go Bankrupt”.
