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FAQ: Should My Startup Issue Stock Certificates?

Sorry, no Draw the Law this week (or next week), as I am working on a something important.  I will announce what it is tomorrow.
As for today, this is a follow-up on a FAQ that a lot of founders and startup corporations ask me.  Should they issue stock certificates?

Is It Required by Law?

As I said last week, no. In Hawaii, a corporation, through its board of directors (under the authority of the articles of incorporation or bylaws) may issue shares without certificates.  In general, most, if not all jurisdictions, have done away with the requirement of a piece of paper signifying ownership in a corporation.

Even social media giant, Facebook, scrapped its plans earlier this year to issue paper stock certificate to its shareholders.  More and more companies are turning to electronic registration as a way to keep track of shares.

What about the Startups?

It’s true large, publicly traded corporations are moving away from the traditions of paper, but does that mean you should.  There are some attorneys who feel you should as it signifies ownership and allows a small group of founders to have a check on each other given the fluidic nature of startups.  Others embrace the digital and just say keep good electronic records and documentation.  Not to mention paper certificates are actually costly to print, which is an added cost your young corporation may not need.

For startups, the founding owners should discuss whether or not they want to issue paper certificates or not.  It really is a personal preference, as some people enjoy having the tangible proof of ownership and nostalgia of the paper.  In fact, Scripophily.com buys an sells original paper stocks for people interested in collecting.  Still others prefer the cheaper method, and just keep an electronic spreadsheet to keep track and just send updates.

If My Startup Decides to Issue Stock Certificates What Does it Require?

Hawaii Revised Statute §414-86 states the following required items to be on a stock certificate if you choose to issue them:

 (b)  At a minimum each share certificate must state on its face:

(1)  The name of the issuing corporation and that it is organized under the law of this State;

(2)  The name of the person to whom issued; and

(3)  The number and class of shares and the designation of the series, if any, the certificate represents.

(c)  If the issuing corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate.  Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge.

(d)  Each share certificate:

(1)  Must be signed (either manually or in facsimile) by two officers designated in the bylaws or by the board of directors; and

(2)  May bear the corporate seal or its facsimile.

Last Word

Personally, on a practical level, I do not think you need them, but that isn’t a legal opinion.  It just has to do with startup expenses and printing out specialized paper may not be necessary and would only drive up your costs at the beginning when you need to focus on your business model.  However, in some cases it may be warranted, but everyone’s situation is different.  Therefore, consider speaking to an attorney to provide advice and their thoughts given your situation on this matter and all that other paperwork that you need!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

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