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Highlights
- Privately placed common stock restricted from immediate resale.
- Requires a letter stating the intent to hold rather than trade.
- Typically issued to insiders, executives, or institutional investors.
What Is Letter Stock?
Letter stock refers to privately issued common stock that is not immediately tradable in public markets. This type of stock is primarily offered to company insiders, executives, or institutional investors as part of private placements, mergers, or compensation packages. The U.S. Securities and Exchange Commission (SEC) regulates these transactions to prevent market manipulation and unauthorized resale.
The Origin of the Name
The term "letter stock" originates from the requirement imposed by the SEC, which mandates that purchasers provide a formal letter stating that the stock is acquired for investment purposes and not for resale. This restriction ensures that privately placed shares do not flood the public market prematurely, protecting both investors and the company’s financial stability.
Regulatory Restrictions and Holding Period
Since letter stock is not registered with the SEC, it falls under Rule 144, which governs the resale of restricted securities. Investors must typically hold these shares for a specified period, often six months to a year, before they can be sold in public markets. Even after the holding period, certain conditions must be met, such as volume limitations and public disclosure requirements.
Use in Corporate Transactions
Letter stock is commonly issued during corporate restructuring, executive compensation plans, or private funding rounds. Startups and growing companies often use it as an alternative to cash compensation, providing early investors and employees with ownership stakes while ensuring long-term commitment to the company’s success.
Conclusion
Letter stock plays a crucial role in private equity and corporate finance by offering an alternative form of investment while maintaining regulatory control over stock sales. With SEC-imposed restrictions and required holding periods, it helps prevent excessive market volatility and ensures that shares are distributed responsibly among investors.
