Non-Assessable Stock

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21 Aug, 2024

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Non-assessable stock refers to a security issued by a firm that does not require extra payment or evaluation from shareholders beyond their starting purchase price for making new investments. The purpose of issuing non-assessable stock is primarily to provide investors with a clear and limited financial obligation.

Public companies mostly use it to encourage capital investment without any unexpected risk of financial obligation and attract new investors. It benefits the shareholders by not making them responsible for the company's obligations and debts surpassing the initial investment. Moreover, public companies use it to provide investors with limited liabilities while promoting confidence in investors toward financial stability.

What Is Non-Assessable Stock?

Non-assessable stock is a type of security issued by a company that does not require shareholders to contribute additional funds or undergo valuation processes when making new investments.
By limiting shareholders' financial liability to their initial investment, it safeguards them from future debts incurred by the company, preventing them from being held responsible.
Moreover, these stocks are essential as they allow shareholders to invest without limited liability, protect them from unexpected financial obligations, reduce risk exposure, attract new company investments, and many more.
In non-assessable stock, Shareholders have limited liability, whereas, in assessable stock, Shareholders undertake to have unlimited liability.

Non-Assessable Stock Explained

Non-assessable stock refers to shares of a company that investors can purchase without being subject to any additional financial obligations beyond the initial purchase price. Investors primarily invest in these stocks because the stocks eliminate the requirement for them to invest additional money after the initial purchase transaction. Hence, the personal assets of investors remain safe from any legal or financial liability of the company issuing shares. All U.S. companies which trade on U.S. exchanges issue non-assessable stock, with investors preferring to invest in them.

Moreover, these shares have legal implications by acting as a wall between the personal assets of investors and shareholders and their investment in the firm. It also necessitates following due diligence concerning terms and conditions attached to the stock issue of the firms. Non-assessable stock is generally more common and attractive to investors since it gives them more certainty about their financial obligations and reduces the risk of unexpected capital demands.

Generally, modern corporate companies issue these shares as part of employee stock ownership plans (ESOPs) or during their initial public offerings (IPOs). As a result, they attract many investors and keep them aloof from any financial liability, reducing the risk and safety of investments. It primarily benefits those investors who seek to limit their exposure to potential losses.

Furthermore, investors must avoid making investments in loss-making or risky firms from their perspective, as such firms may not guarantee profits. In light of the above negatives, investors must follow the below strategy to mitigate risk and gain from their investments:

The financial stability of a firm must be studied carefully.
One must ascertain the growth potential of the firm.
Investors must be aware of industry trends.
Assess the terms and conditions of the sharing issue.
Look carefully for transferability restrictions.
Diversifying the investment portfolio.
Finally, getting professional help becomes necessary.

Examples

Let us use a few examples to get hold of the topic.

Example #1

Suppose Data Bricks Ltd Tech Corporation is a startup in artificial intelligence. Hence, they issue non-assessable stock to raise capital for their research and development efforts. They issue 50,000 shares of non-assessable stock at $20 per share.

Therefore, Jack, an investor, purchases 1,000 shares, investing $20,000. And Karen, another investor, buys 500 shares, investing $10,000. Thus, the market recognizes their achievements, and the company's valuation increases to $5 million.

Besides, both the investor benefits from the company's success. The value of their non-assessable stock increases proportionally to the company's valuation. However, regardless of how much its value has grown, the company only requires them to contribute additional funds.

This example illustrates how these stocks allow investors to enjoy the benefits of a company's success without the risk of being obligated to invest more money if the company faces financial difficulties in the future.

Example #2

Lightning Motors, Inc. (NYSE: ZEV), a top supplier of low-emission medium-duty commercial vehicles and electric-powered cars for fleets, announced on April 27, 2023, that its Board of Directors has approved a 1-for-20 reverse stock split of its issued and outstanding shares of ordinary stock. The company will commence trading its common stock under the ticker code "ZEV" on the New York Stock Exchange (NYSE) on April 28, 2023.

When the reverse stock split goes into effect, every twenty shares of common stock issued and outstanding will be immediately converted into one share. Moreover, the shareholders who would otherwise be entitled to fractional shares because they own several shares of common stock that are not evenly divisible by the reverse stock split ratio will get a cash payout equivalent to the value of the partial share.

The opposing stock split has no impact on the total number of authorized shares of common stock or its par value. The reverse stock split will have an equal impact on each and every shareholder, and no stockholder's ownership of the company's common shares will alter as a result. Remaining completely paid and non-assessable are the common shares that were issued as a result of the reverse stock split.

Importance

The non-assessable stock is key to a firm's growth and stability. Therefore, it embodies specific importance to investors, stakeholders, and firms as given here:

Shareholders enjoy the advantage of investment without any limited liability beyond their initial share purchase transaction.
Investors get protection from any future unexpected financial obligations or calls.
It reduces overall exposure to risk from any additional call for investment, thereby increasing their confidence.
Moreover, it allows firms to attract more and new investments into buying their stocks.
Companies get an opportunity to issue new securities flexibly per the changing financial requirements and go behind new growth opportunities.
As the investors don't get burdened with the ownership risk of the securities, they come in large numbers to invest in firms without any danger to their assets.
Furthermore, it helps firms to segregate the company's financial liabilities from shareholders' assets leading to the promotion of best corporate governance.
Hence, it also results in the management making responsible business decisions, being more transparent to investors, and encouraging accountability in the company's financial activities.
Finally, it also transforms a company issuing such stock into a more competitive firm, differentiating it from competitors, which attracts investors for low-risk, high-yield investment.

Non-Assessable Stock vs Assessable Stock

Let us use the table below to compare the two:

Non-Assessable Stock	Assessable Stock
Beyond the initial share price, no additional money is required to be paid to the company.	It refers to the initial share price; some or any additional money must be paid to the company.
Shareholders have limited liability	Investors undertake to have unlimited liability
It protects investors' capital from future ambiguous liabilities and also attracts investors.	These stocks allow the company to call for extra shareholder capital to meet its financial requirements.
Most public companies use it	No modern companies use it to fund capital for their financial needs.
Moreover, it helps boost investors' confidence in the company by increasing its financial stability.	The possibility of future financial obligations decreases investors' confidence in the company.
In the absence of unexpected financial obligations, investors are encouraged to invest more in the company.	It exposes investors to future evaluation as it allows for additional capital raising flexibly.

Frequently Asked Questions (FAQs)

1. What is the difference between non-assessable stock and non-transferable stock?

The main differences between non-assessable stock and non-transferable stock:
- Non-assessable stock restricts liability, while non-transferable stock limits share transfer.
- Moreover, it protects shareholders from obligations, while non-transferable stock hinders free share transferability.
- While non-transferable stock focuses primarily on share transfer restrictions, non-assessable stock focuses mainly on liability protection.

2. How does non-assessable stock impact shareholder rights?

Non-assessable stock generally grants shareholders the same rights as assessable stock, such as voting rights and dividends. However, the critical difference lies in the need for additional financial liability for non-assessable stockholders.

3. Can non-assessable stock be converted to assessable stock?

Typically, non-assessable stock remains non-assessable and cannot be converted into assessable stock. The company decides to issue non-assessable stock during the initial stock issuance.

4. How is the price of non-assessable stock determined?

The price of non-assessable stock is generally based on the company's perceived value and market demand. Without a fixed par value, the company has more flexibility to set the price per share on its current valuation.