Key Takeaways

  • No par stock is issued without a face value printed on the stock certificate or articles of incorporation.
  • Par value is a nominal figure with little relevance today, but it historically set minimum legal capital.
  • Issuing no par common stock gives companies flexibility in setting share prices and reduces liability risks.
  • While investors focus on market value, par value still matters for bonds and preferred stock.
  • State laws often recognize no par stock to streamline incorporation and simplify accounting practices.
  • Advantages include reduced administrative burdens, fewer shareholder disputes, and pricing flexibility.
  • Risks include potential shareholder confusion and limited applicability in certain jurisdictions.

No par stock is stock that has been issued without a value listed on the face of the stock certificate. Many people often wonder if it makes a difference whether or not the value is stated directly on the stock. In many states, there are rules created to protect shareholders so that the board of directors of a company does not issue too much stock, thus depreciating the value of the shareholder's investment. This is referred to as a minimum legal capital law, which requires that a corporation maintain a minimum amount of assets at all times. 

This will help protect the stock value for investors during years in which the business may be unprofitable by maintaining a certain level of assets. These minimum capital requirements are often based on a par value that has been set up during the drafting of the corporate charter.

Many people can become confused when discussing the par value of stock due to the fact that the meaning may be different depending on whether you are referring to equity or debt.

Explaining Par Value

Par value used to be the price that the company had originally valued their shares when they were first sold. This becomes a theoretical liability from the company to the shareholders because if the market value of the stock drops below what the par value was indicated, the company would be liable for the value of the difference. This is because par value is the nominal value at which the stock can be redeemed. 

For example, if a bond was issued at a par value of $500, once it matures, it could be redeemed for $1,000. This is extremely important for fixed-income securities such as bonds where the interest payment on preferred shares is based on a percentage of the par. For example, an 8 percent bond with a par value of $500 would gain the investor $0 in interest.

In stock issuance today, most stocks are now issued with a significantly low par value such as $0.01 per share or listed as no par value at all, to prevent the theoretical liability a company could incur. 

Legal and Accounting Treatment of No Par Stock

No par stock is common in jurisdictions that allow corporations to issue shares without assigning a minimum face value. Legally, this means the corporation’s board of directors has authority to determine the issuance price, as long as it complies with state corporate laws. For accounting purposes, no par stock is typically recorded in the company’s equity accounts at the price paid by investors, with no arbitrary “par” amount inflating the balance sheet.

This simplifies corporate accounting because it avoids overstating legal capital and allows equity to reflect actual paid-in value. Some states, however, still require corporations to designate a stated value per share to meet minimum capital requirements, which acts as a functional substitute for par value.

Why Issue No Par Stock?

You may find yourself wondering why a company would issue stock with no par value or why a shareholder would accept it. There are many reasons for a business to issue no par stock such as:

  • The par value has nothing to do with the value the stock has in the market.
  • A no par stock can still trade for hundreds of thousands of dollars.
  • It gives a company the flexibility to set higher future stock prices.
  • There is less liability to the shareholders if the stock was to fall drastically.
  • It allows the price of the stock to experience the natural variations.
  • It protects stock from being misrepresented in value.
  • It allows the price to be determined by the value that investors are willing to pay. This can be determined by cash flow, competition, and changes in technology.

Often, the decision to issue no par value stock is indicated in the company's Articles of Incorporation or indicated on the stock certificate itself. The stock will be issued as either no par value or low par value. While the stock may be issued with no set value, the value that they will trade for on the open market will be determined by what the investors are willing to pay for shares in that company. 

Since pricing fluctuates with the market, an investor is often not concerned with the face value amount of the stock but what it is worth currently on the market. Sometimes having a par value listed on the stock that is significantly different than it trades on the market may make it a less attractive option for those issuing the stock.

With the high benefits of issuing no par stock, state governments are becoming more accepting of no par stock trends. The acceptance of no par stock issuance with companies, as well as government agencies, is making it a more common practice and is beginning to eliminate the necessity of having par value stock. It is important to note that the use of no par stock is not accepted with types of securities, such as bonds, as the par value is the same as the face value of the instrument. 

Advantages of No Par Common Stock

Companies often choose to issue no par stock for several reasons:

  • Flexibility in Pricing: The board can set share prices based on market conditions without being bound by an arbitrary par value.
  • Reduced Liability: Without a stated par value, shareholders cannot be held liable for paying less than par if market prices fall below a nominal face value.
  • Simplified Incorporation: Many modern corporate statutes allow or even encourage no par stock because it reduces unnecessary legal capital requirements.
  • Investor Focus on Market Value: Since investors care more about current market price and earnings potential, par value has little practical importance in common stock trading.
  • Easier for Startups: New companies often use no par stock to avoid complex capital structuring at an early stage.

Potential Risks and Considerations

While no par stock has benefits, there are risks and considerations:

  • Jurisdictional Restrictions: Some states still require corporations to set a par or “stated” value. Businesses must check local statutes before relying solely on no par stock.
  • Investor Confusion: New investors may mistakenly assume “no par” means “no value,” even though the stock can trade at high prices. Clear disclosures in offering documents can reduce this risk.
  • Limited Role in Bonds and Preferred Stock: Par value remains crucial for debt instruments and preferred shares, where dividends and redemption amounts are tied to par.
  • Accounting Disclosures: Companies must carefully record proceeds from stock issuances to ensure proper shareholder equity reporting.

Practical Examples in the Market

Consider two scenarios:

  1. Tech Startups: Many emerging tech companies incorporate in states like Delaware and issue no par stock to avoid unnecessary par value rules. This flexibility allows them to raise funds from venture capital firms at varying share prices.
  2. Public Companies: Larger corporations often issue shares with a nominal par value of $0.01 or designate no par stock to streamline legal compliance. The shares then trade freely in the open market at prices determined solely by investor demand.

These examples highlight how no par stock supports both early-stage financing and mature market operations.

Frequently Asked Questions

  1. What is no par common stock?
    No par common stock is stock issued without a face value printed on the certificate or corporate charter. Its value is determined entirely by market demand.
  2. Why do companies issue no par stock?
    Companies issue it to avoid liability tied to par value, simplify incorporation, and give flexibility in setting future share prices.
  3. Does no par stock affect shareholder rights?
    No. Shareholder voting rights, dividend entitlements, and ownership percentages are unaffected by whether stock has par value.
  4. Is no par stock legal in all states?
    Not all states. While most permit no par stock, some require corporations to assign a nominal stated value for legal capital purposes.
  5. How is no par stock recorded in accounting?
    It is recorded at the price paid by investors, with the entire amount credited to common stock or additional paid-in capital, depending on state rules.

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