Legal Question in Business Law in California

Re: Stock Registration

Registration affects transferability. Shares that are unregistered cannot be sold lawfully, either by the original issuer (the company) or any subsequent owner EXCEPT in reliance upon one of the several statutory exemptions from registration.

Also, unregistered stock is more likely to be governed by contractual restrictions on transfer, such as buy-back or right of first refusal options in favor of the company or its controlling shareholders.

All of these restrictions on transferability have some effect on the market value, since shares that are not freely transferable have a smaller (legal) market and this will affect demand and transfer (transaction) costs.

Nevertheless, unregistered shares can be very valuable. Since there is no trading market, determining the value is a very difficult process. You have to know the company well, know the restrictions on the stock, etc.

Fundamentally, the value of all the shares in a company, if added up, equals the value of the equity (assets less liabilities). A company with substantial equity (or net worth) will have valuable shares -- essentially net worth divided by number of shares would be the theoretical value. The market may not reflect the theoretical value because the market is imperfect and opinions on value will differ.

Re: Stock Registration

It depends. If you are being asked to invest in a small corporation (35 members or less), you meet certain financial requirements, or know the proprietor(s), and the corporation has complied with all federal and state securities laws in issuing the stock, it might be worth a percentage of whatever the company is worth. This type of stock is not "worth" anything in the normal sense (i.e., you cannot trade the stock in the open market, and there are certain other transfer restrictions), but can sometimes be worth the risk of investing your money.

On the other hand, if you are being offered a "great deal" by someone purporting to own stock which is not registered, it would not be wise to "invest" in that stock. The old saying, "if it sounds to good to be true it probably is" is particularly applicable to purchases of unregistered securities.

If you live in California, and the company is in California, you can check with the Secretary of State to see if the company is truly a corporation in good standing, and can further check with the Securities and Exchange Commission to see if they have any record of the existence of the company. The bottom line is, you better "do your homework" and find out as much as you can about the company before you decide to invest anything in its stock.