Many people harbor the common misconception that stock certificates are the actual security instead of a representation of the security. Stock certificates are different from cash or bonds, where the physical paper gives a person ownership. As intricately colored and formally illustrated as they may be, stock certificates are merely evidence that a holder has stock, not definitive proof of ownership.Paper versus Electronic Stock Certificates
Stock certificates come in two forms: paper stock certificates or electronic stock certificates (not to be confused with “uncertificated stock,” which has no corresponding certificates at all, or a scanned copy of paper stock). Although the paper stock certificate still exists, it costs a great deal ($500) to replace, it is easier to lose, and it is harder to keep track of in a stock ledger than the electronic stock certificates that have come about in recent years. In the past decade, both business people and regulators have come to embrace the efficiency and ease of electronic stock certificates. As a consequence, many of today’s companies, such as Facebook, Bank of America, and the Walt Disney Company have decided not to issue physical stock certificates and to instead issue electronic certificates.The Age of Electronic Stock
A confluence of events made electronic stock certificates more widespread today than ever before. The business world is increasingly comfortable with electronic documents that have no corresponding paper copy. As tracking certificates and updating the stock ledger became a wholly electronic task, stock certificates followed suit. The bank agents that are responsible for distributing cash or securities in connection with the sale of the company have also become more experienced and more comfortable with this modern form of certificate. Startup business people in particular embraced electronic stock certificates because they eliminate the wait time associated with having a law firm go through the labor-intensive process of “cutting” and issuing paper stock certificates. Likewise, electronic stock certificates make it easier and less costly for a company to cancel, reissue, and keep track of the certificates.Meeting the Legal Requirements
A company must follow the laws concerning electronic stock certificates for the state in which they are incorporated. For instance, under Delaware Corporation Law, a stock certificate must meet a number of requirements, including stating the name of the company, the number of shares, and any restrictions on transferring the shares. The stock certificate must also be signed by the appropriate corporate agent. An electronic certificate meets these requirements as easily as with a paper certificate, however the electronic certificate can be processed far more efficiently. Many states, including Delaware, honor the electronic signature on an electronic stock certificate the same as a signature on the paper equivalent. As long as the stock certificate complies with Delaware’s requirements, whether your stock certificate is paper filed away in a drawer, or on your computer screen is irrelevant—your ownership of that stock is the same.
Before you start generating electronic stock certificates, your company must approve the issuance of electronic stock certificates in a quick board consent. The board consent often states something like, “The company approves the following form of certificate...” Companies that value efficiency have been successful in adopting electronic stock certificates by having their board members sign a board consent as short as one sentence.Taking the Paperless Plunge
Paper stock is a comfortable tradition, but if your company still uses paper stock certificates it’s probably time for an update to a system that is easier to manage, widely accepted, and secure. And if you miss the warm, fuzzy feeling of actually holding a colorful stock certificate in your hand, you can always print out your electronic one! At the end of the day, the value is exactly the same.
Did you know that Fidelity can help you issue electronic stock certificates? Click here to learn more.
Third parties mentioned and Fidelity are not affiliated. Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.