Gifting of Shares – Do Not Do It !
We have recently had a couple of projects where the founders of companies either gifted shares, or were planning on gifting shares, to friends and family members. There may be several reasons why someone would want to give shares they own in company. They may simply want help out or give something to family members that do not have very much of their own. This can be a common occurrence for someone who grew up in a family that was relatively poor, or did not have a lot. They want to share their success with those who they care about who have not had a lot of success. The other common reason, is that they are looking to add to the total number of shareholders their company has, and do not feel they know people who are sophisticated enough to understand investing in a private company that is looking to go public. There can be other reasons for which someone looks to give shares as a gift.
This is a very problematic thing to do that we do not recommend any company founder engage in.There are two (2) very big problems that result when a company founder give shares as a gift to someone.
The 1st being that when it comes time to file the 15c2-11 application, FINRA will not recognize shareholders who obtained their shares as a result of receiving them as a gift. Further, as part of the review the FINRA review process, the sponsoring broker/dealer will need to provide a table of the existing shareholders and how they received their shares. The existence of shareholders who received their shares as a gift will create extra scrutiny from FINRA. This will only serve to delay the approval of the 15c2-11.
The 2nd being that due to current Anti-Money Laundering (AML) rules and regulations, shareholders who receive their shares as a gift are not currently able to deposit their shares into a brokerage account. As a result, anyone who receives shares as a gift can never sell their shares.
The solution to this problem is sell the shares to the relatives. The sale will need to involve the use of a Stock Purchase Agreement, and the shareholders will need to pay for the shares with a check; very importantly the shareholders will need to keep a copy of the check, and an image of the cancelled check in order to be able to demonstrate proof of payment for the shares. The per share price can be at a deeply discounted price. This is the best way to handle a desire to distribute some shares to family members.
These items are required by FINRA as part of the 15c2-11 application review process. Additionally, they are required by brokerage firms when they are complying with the Anti-Money Laundering (AML) rules and regulations. Keeping these documents available in a well organized manner will save a company and its shareholders a lot of headaches.
If you have any questions regarding the topics of this blog post, please feel free to contact our office. We will be more than happy to be of service.
Coral Capital Partners provides assistance to companies seeking to file a 15c2-11 and have their shares become publicly traded on the Over the Counter Market (OTC). Companies seeking to have their shares listed on the US Over the Counter (OTC) market should feel free to contact the offices of Coral Capital Partners to see how we may be of assistance. Additionally, Coral Capital Partners provides assistance to companies seeking to have their shares become DTC Eligible so that they may be deposited into streetname at their brokerage account.