Legal Question in Securities Law in Illinois

Re: Stock Cert. Issuance

Usually when corporate stock of a privately owned corporation is issued to an investor, the issuance of the stock is exempt from registration with the Securities and Exchange Commission. There are various "safe harbor" exemptions under Regulation D, and the sale of stock in a closely held corporation generally falls under one or more of those safe harbors.

You also ask "How can the investor be assured the stock issuance is legal and binding?" Registration with the SEC (or filing with the Illinois Secretary of State under Illinois' "blue sky" laws) does not make the issuance any more "legal and binding." Failure to comply with the law has consequences to the issuer, but does not negatively impact the right of the purchaser to own his stock.

It is somewhat over-simplified, but basically the issues are these:

1. Did the corporation have sufficient "authorized shares" under its articles of incorporation?

2. Did the board of directors establish the consideration and approve the issuance of the shares?

3. Was the consideration for the shares paid to the corporation?

Answer those questions in the affirmative and you will generally have stock that is "fully paid and nonassessable."

David K. Staub, Illinois corporate and securities law attorney