The Difference Between Certificated Securities and Uncertificated Securities

A security refers to an ownership interest in a business or a financial instrument, such as common stock, which are types of financial assets. These ownership interests can be in a private LLC, a corporation, or in a publicly traded stock or bond. There are two choices for holding ownership interests in a security: certificated and uncertificated securities. You can either own it as a certificated security or as an uncertificated security. In this article, we will walk you through the differences between the two forms: certificated or uncertificated security, and when it’s best to use each one.

Uncertificated Security

An uncertificated security is a security whose ownership is not represented by a physical stock certificate. Securities intermediaries transmit information regarding ownership and transactions through agreed-upon methods, ensuring compliance with financial regulations. These securities are managed by a securities intermediary acting on behalf of the owner, who maintains the records and facilitates transactions. Security entitlements define the rights and property interests that a person holds when they possess financial assets through a securities intermediary. These security interests are typically in a registered form and registered on the books of the issuer and are tracked electronically. Given technology’s role today, this is how most securities are held. Other names for uncertificated securities include book-entry securities and electronic securities.

Pros of Uncertificated Securities

Securities can be bought and sold electronically on securities markets in financial markets. There are many different trading platforms today that you can buy and sell from, and given the ease of trading uncertificated securities, it is the faster, more efficient option.

The advantage is that there is no need for filling out and transferring paperwork, which reduces the overall cost of buying and selling stocks. And because uncertificated securities aren’t in paper form, there is little risk that they can be lost or stolen.

Cons of Uncertificated Securities

While uncertificated securities are preferred in many situations, there are some downsides to using them. One of them is that its owners don’t have physical proof of ownership. Without a physical certificate, the entitlement holder must rely on electronic records, which can be vulnerable to hacking or data loss. A person's claim to ownership is evidenced through these electronic records, which are legally recognized within the framework of financial regulations. This can be an issue when owners are perhaps concerned about hacking or a widespread loss of data. A physical certificate avoids such risks.

And most importantly, using uncertificated securities does not provide nearly as good asset protection. Courts treat uncertificated securities as “general intangibles.” General intangibles are non-physical assets, like electronic stock ownership, and courts in your state of residence can easily exercise jurisdiction over them. So, when an individual is sued in their home state by an adverse claimant, their home state court can exercise jurisdiction over their uncertificated security.

Here’s an example. Let’s say that you live in California and own an interest (that’s an uncertificated security) in a Wyoming LLC. You then get sued in California. Because your interest in the Wyoming LLC is a general intangible that follows you to California, California will apply their law to the dispute. In this case, Wyoming’s stronger charging order protection wouldn’t apply to protect your interest in the Wyoming LLC.

Certificated Security

A certificated security is a security that is represented by a physical certificate representing ownership. A transfer agent is responsible for maintaining the records and facilitating the transfer of certificated securities. When you buy a certificated security, you receive a physical paper evidencing your ownership. This stock certificate contains important information about the security, including the owner’s name, the number of shares owned, the date that the owner received the security certificate, and any restrictions on transfer. The indorsement can be made on the security certificate or on a separate document. When a person acquires a security entitlement, they become an entitlement holder with specific rights and ownership implications. When you sell the stock, you transfer the physical certificate to the buyer.

Pros of Certificated Securities

The advantages to having certificated securities are greater asset protection, as discussed below. An appropriate person is authorized to endorse or originate financial instructions, ensuring that any actions taken on behalf of a purchaser or transferor are properly executed and legally valid. Certificated securities provide a tangible property interest, which can offer greater asset protection to entitlement holders by establishing a legal framework for their claims and actions regarding these financial assets.

Cons of Certificated Securities

There are more obvious cons to owning a certificated security. One significant factor is the interest rate, which plays a crucial role in defining the terms of debt securities and affects payments to holders. Selling a certificated security is more difficult and time-consuming. Transferring certificated securities in the ordinary course of business is particularly challenging due to the additional steps and regulatory requirements involved. Given how easy it is to buy and sell uncertificated securities online, trading certificated securities for public companies is not the best option for institutional investors. Another downside is the cost associated with physically transferring the security certificate from a seller to a buyer. And because they’re in paper form, these certificated securities can easily be lost or stolen. But for your own personal investments let’s consider Armor-8.

Armor-8

At Corporate Direct we offer certificated securities for your own personally held Wyoming LLCs with our Armor-8 protection.

A clearing corporation provides the necessary clearance and settlement services to ensure the security certificate is properly managed and protected under federal securities laws.

A clearing agency provides the necessary clearance and settlement services to ensure the security certificate is properly managed and protected.

There are many states that offer weak asset protection (like California). However, if you are a resident of one of those states, there is a little wrinkle in the law that can protect you. Under the UCC Article 8, if the certificated security is delivered and kept in one state, then that state’s law will apply to how a creditor can reach its assets. Said another way, this means that if the security certificate is delivered and kept in Wyoming, then the out-of-state court must apply Wyoming’s charging order, a much stronger asset protection remedy.

We have a safe deposit box at a Wyoming bank to ensure that the security certificate is delivered and kept in Wyoming. This places the underlying asset, the security certificate, out of reach from your home state creditors. And the only way for them to reach it is to have a lawyer in Wyoming get a court order to release the paper certificate. This is a cumbersome process for an attorney on a contingency fee. The hassle factor gives you better asset protection.

Conclusion

Holding a certificated security can come in handy when you don’t want to sell your interest and want to protect your assets, as it provides a clear security entitlement. A protected purchaser is someone who gives value for a security without having notice of any adverse claims, thereby obtaining a position free from those adverse claims. A financial asset held in this manner ensures that your property interests are well-defined and safeguarded. It also helps in safeguarding your ownership rights. However, uncertificated securities are helpful where they are regularly bought and sold on an exchange. Knowing this difference may be able to help you before you set up your business.

We here at Corporate Direct can help you protect your assets with our Armor-8 protection. This will provide you with a certificated security interest held in Wyoming for your protection from creditors.

For more information on our Armor-8 protection, schedule a consultation with us.

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

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