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The Difference Between Certificated And Uncertificated Securities
Certificated Stock: The Difference Between Certificated And Uncertificated Securities
A security refers to an ownership interest in a business or a financial instrument. These ownership interests can be in a private LLC, or corporation, or in a publicly traded stock or bond. There are two choices for holding ownership interests in a security. You can either own it either as a certificated security, or as an uncertificated security. In this article, we will walk you through the differences between the two, and when it’s best to use each one. Generally, certificated stock is issued as a physical document, representing ownership through paper share certificates or stock certificates.
Uncertificated Security
An uncertificated security is a security whose ownership is not represented by a physical stock certificate. These security interests are 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. These are also known as uncertificated shares, which offer advantages over traditional certificated shares by reducing risks of loss, theft, and administrative errors.
Pros of Uncertificated Securities
Securities can be bought and sold electronically. 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. Uncertificated shares also facilitate more efficient record-keeping for shareholders and stockholders, and reduce risks associated with paper certificates and share certificates.
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. This can be an issue when owners are perhaps concerned about hacking or a widespread loss of data. A physical certificate avoids such risks. Some investors and clients may still prefer physical certificates for peace of mind, despite the advantages of electronic records.
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, 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. When you buy a certificated security, you receive a physical paper evidencing your ownership. Certificated shares are represented by physical stock certificates, and the process of issuance and purchase involves the creation and transfer of these certificates. 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. When you sell the stock, you transfer the physical certificate to the buyer.
Pros of Certificated Securities
The advantages to having certificated securities is greater asset protection, as discussed below. Holding physical certificates can also help determine ownership and value in the event of a dispute or company reorganization.
Cons of Certificated Securities
There are more obvious cons to owning a certificated security. Selling a certificated security is more difficult and time consuming. Given how easy it is to buy and sell uncertificated securities online, trading certificated securities for public companies is not the best option for 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. Paper share certificates are vulnerable to loss, theft, or forgery, and the process of having certificates physically transferred during delivery and purchase can be challenging. 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.
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.
Private companies often face delays and risks in transferring certificated shares, and Armor-8 helps address these issues for clients by providing a secure and efficient process. Records of ownership are securely maintained, which is important for tax and legal compliance.
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 security certificate out of reach from your home state creditors. The signed and delivered certificates are kept in Wyoming, and this process helps determine the rightful owner in case of legal disputes. 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.
Funds and capital are better protected when held as certificated securities in a secure jurisdiction, reducing risks associated with electronic transfers and providing greater certainty for investment and asset management.
The process of transferring certificates can be cumbersome, especially when acquired through mergers or when the company has changed ownership, requiring additional verification and legal steps.
Holding a certificated security can come in handy when you don’t want to sell your interest and want to protect your assets. However, uncertificated securities are helpful where they are regularly bought and sold on an exchange. The market for certificated shares is less liquid than for uncertificated shares, and exchanges and the futures market have moved towards electronic systems for trading commodity and futures contracts. Demand for physical certificates has decreased as sellers and investors prefer the efficiency of electronic systems.
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.
Each instance of lost or stolen certificates can create significant challenges for shareholders and stockholders, and modern systems help mitigate these risks.
