No par value stock

What Is No Par Value Stock?

No par value stock refers to shares issued by a corporation without a specified minimum or "face" value stated in its articles of incorporation or on the stock certificates themselves. In the realm of corporate finance, this distinguishes it from par value stock, which carries a nominal value. The actual value of no par value stock is instead determined by the market, based on factors such as investor willingness to pay and the company's financial performance. This type of stock offers companies greater flexibility in setting share prices and managing their capital stock.

History and Origin

The concept of par value stock dates back to the 1800s, when companies began issuing shares to raise capital. At that time, a fixed nominal value, known as par value, was often printed on stock certificates, serving as a baseline for the capital a company could raise and a measure of protection for creditors. Companies were expected to maintain this stated capital, and shareholders could be held liable if shares were issued below par value, as this was seen as "watering" the stock and potentially misleading investors.¹¹,¹⁰

However, as capital markets evolved in the early 1900s, the relevance of par value began to diminish. Companies started issuing shares without a par value, leading to the rise of no par value stock. This shift was partly driven by the desire to reduce legal and accounting complexities associated with maintaining a fixed par value. The state of New York pioneered legislation permitting the issuance of no par value shares in 1912, aiming to safeguard the public by encouraging investors to investigate a stock's actual worth rather than relying on an arbitrary face value.⁹ Many other U.S. states followed suit, including Delaware, a popular jurisdiction for corporate incorporation.⁸,⁷

Key Takeaways

• No par value stock does not have a nominal or face value printed on the stock certificate or specified in the company's charter.
• Its price is determined by market forces, primarily supply and demand.
• Issuing no par value stock can provide companies with greater flexibility in setting share prices and capital management.
• It generally reduces the risk of legal liabilities that might arise if par value stock is issued below its stated par.
• The accounting treatment for no par value stock differs from par value stock, typically crediting the entire proceeds directly to the common stock or stated capital account.

Interpreting the No Par Value Stock

When dealing with no par value stock, investors and analysts interpret its value based entirely on its market price. Unlike par value stock, where the par amount historically represented a minimum legal capital contribution or a base for liability, no par value stock removes this artificial floor. Instead, its valuation reflects the prevailing economic conditions, the issuing company's financial health, and investor sentiment in the stock market.

For companies, the lack of a par value means that all proceeds from the issuance of no par value stock are generally treated as stated capital. This simplifies the accounting process by eliminating the need to differentiate between the par value and additional paid-in capital when recording the issuance of shares on the company's books.

Hypothetical Example

Imagine a newly formed technology startup, "InnovateTech Inc.," is preparing its initial public offering (IPO). The board of directors decides to issue 10 million shares of no par value common stock to raise capital for expansion.

Since there is no par value, InnovateTech Inc. does not have a minimum price per share dictated by its corporate charter. Through its underwriters, the company assesses market demand and determines an offering price of $15 per share.

When the shares are sold, the accounting entry for InnovateTech Inc. would be:

Debit: Cash (or equivalent asset) - $150,000,000 (10,000,000 shares * $15/share)
Credit: Common Stock (or Stated Capital) - $150,000,000

In this scenario, the entire proceeds from the stock issuance are credited to the common stock account within shareholders' equity. This simplifies the company's balance sheet presentation related to equity.

Practical Applications

No par value stock is widely used in modern corporate structures due to its practical advantages.

1. Flexibility in Pricing: Companies can issue no par value stock at any price the market will bear, without concerns about issuing shares below a legally mandated minimum par value. This is particularly beneficial for startups or companies undergoing financial restructuring, allowing them to raise capital more efficiently.
2. Simplified Accounting: When no par value stock is issued, the entire amount received from the sale of shares is typically recorded directly into the common stock or stated capital account. This contrasts with par value stock, which requires splitting the proceeds between the par value account and an additional paid-in capital account. The U.S. Securities and Exchange Commission (SEC) has provided guidance on the presentation of no par value stock on financial statements, noting that all related amounts can be presented as paid-in capital.⁶
3. Reduced Legal Liability: Historically, shareholders could face liability to creditors if par value stock was issued for less than its par value, as this could imply inadequate capital. No par value stock eliminates this specific concern, offering a cleaner legal framework for stock issuance.
4. Dividend Calculations: While par value can sometimes be a factor in determining whether a surplus exists for dividend payments in some jurisdictions, no par value stock simplifies this by allowing the board of directors to allocate a portion of the consideration received to capital and the remainder to paid-in surplus, which can then be available for dividends. This is evident in corporate laws, such as those in Delaware, which distinguish between par value and no par value stock for capital determination.⁵

Limitations and Criticisms

Despite its widespread adoption, no par value stock is not without its limitations and historical criticisms.

One primary criticism, historically articulated by legal scholars like Arthur Bonbright, centered on concerns that no par value stock could potentially facilitate the manipulation of a company's capital structure. Critics worried that it might strip corporate creditors of protection previously afforded by par value stock, which imposed liability on shareholders whose stock was issued for less than par value. There were also concerns that companies might segregate parts of the capital received from a stock issue into "paid-in surplus," making it wrongfully available for dividends rather than preserving it as a cushion for creditors.⁴

Another point of contention relates to franchise taxes in certain states. For example, some jurisdictions, notably Delaware, levy annual franchise taxes on corporations based on their authorized shares or assumed capital. While Delaware permits no par value stock, authorizing a large number of such shares can sometimes result in significantly higher franchise tax liabilities compared to shares with a very low nominal par value.³,² This can influence a company's decision on whether to assign a minimal par value or none at all, impacting their corporate governance strategy.

Furthermore, some academic research suggests that the presence (or absence) of par value, and the resulting structure of shareholders' equity, can still influence investor perception. Studies have indicated that decreasing the par value might prompt perceptual biases among investors that could be beneficial to the success of a stock issuance, implying that while the nominal value is arbitrary, its strategic setting can still play a role in how a company is perceived.¹

No Par Value Stock vs. Par Value Stock

The fundamental difference between no par value stock and par value stock lies in the presence or absence of a nominal, arbitrary value assigned to each share.

While par value stock historically served as a protective measure for creditors by establishing a minimum capital base, its practical significance has largely diminished in many jurisdictions. Many companies today opt for no par value stock or a very low par value (e.g., $0.0001) to avoid the legal and accounting complexities associated with issuing shares below par.

FAQs

Why do companies issue no par value stock?

Companies issue no par value stock primarily for flexibility. It allows them to sell shares at any price dictated by market conditions without worrying about legal restrictions against issuing shares below an arbitrary par value. This simplifies capital raising and accounting.

Does no par value stock have a real value?

Yes, absolutely. The absence of a "par" value does not mean the stock is worthless. Its real value is determined by the price investors are willing to pay for it on the stock market, which reflects the company's financial performance, future prospects, and overall market sentiment.

How is no par value stock accounted for on a company's balance sheet?

When no par value stock is issued, the entire amount of cash or other consideration received from investors is typically recorded as an increase in the company's common stock or stated capital account under shareholders' equity. There is no need to separate a par value component from an additional paid-in capital component.

Can all companies issue no par value stock?

The ability to issue no par value stock depends on the laws of the jurisdiction where the company is incorporated. Most U.S. states and many other countries permit it, but some may still require a par value or have specific regulations regarding its use.

Does no par value affect dividends?

Generally, no. The decision to pay dividends is based on a company's accumulated earnings and surplus, not on whether its shares have a par value. However, corporate laws may define "legal capital" or "surplus" differently for par vs. no par stock, which could indirectly influence how much capital is considered available for distributions.