1

Recently a company in which I own a few shares issued a bunch of options for a portion of their business which was not previously traded publicly. This subsidiary business will begin trading publicly next year under a new symbol entirely separate from the parent company.

I've been trading securities casually for a couple of years, but have never experienced this before (i.e. receiving stock options for a new company in a "distribution" to current shareholders). The cost of the new shares represented by the options were easily within my budget, so more out of curiosity I decided to exercise the options and purchase the shares. I called the brokerage and told them what I wanted to do- they raised no red flags, handled it like any other standard request, and I assumed the transaction would complete without any problems.

The next day, however, I got a call back from the brokerage. The issuing (parent) company apparently was requiring a "Qualified Investor Letter" (or something like that) stating that the entity/individual exercising the stock options had assets totaling at least 100 million dollars or more. In other words, the options were unusable by a "hundredaire" like me, other than to sell them on the options market (which would cost me several times more in transaction fees than the total value of the options). The options were not a "right to purchase" after all, instead they were essentially worthless.

Maybe it's a sign of my own inexperience, but the requirement to have massive backing assets just to exercise stock options kind of rubbed me the wrong way. I can see the parent company not wanting to deal with millions (literally) of small-fry transactions like mine, but isn't the option a legal document? I always thought of a stock option as a legal contract stating "This entitles the bearer to purchase 1 share of XYZ stock before {DATE} at {PRICE}" (regardless of the bearer's identity- anyone providing a contract i.e. option along with the cash value stated would walk away with 1 share in return, period).

Is it common for companies to put similar requirements on issued securities? (Or is what I'm describing just as shady as it seems to me?)

  • 1
    Just to clarify: So, the company issued these options to existing shareholders, correct? In other words, you didn't acquire these options on the open market? And, is there a public market for these options already? Also, how long do these options have until expiry? Is the spinoff event likely to happen before that date, or only after that date? – Chris W. Rea Dec 20 '16 at 17:56
  • 1
    The options were distributed to existing shareholders at a rate of 1/16 (for every 16 shares of company A that I own, I received 1 option for the soon-to-exist company B), so these were not purchased on the open market. I believe these are traded publicly however (they have a current value when I view them online), but the value is minuscule. The dates have been kinda weird too- the official announcement was Nov 23ish, expiring Dec 21; however nothing appeared in my account until the week of Dec 12. I wrote this off as due to the parent company being a foreign entity (out of Canada). – Derek_6424246 Dec 20 '16 at 18:18
  • $100 million? Are you sure you're reading that correctly? There are a few different hurdles to reach the status of "Qualified Investor", but I don't recall anything approaching that figure. – Glen Pierce Jan 7 '18 at 15:18
  • @GlenPierce This is a memory of a voice conversation from a year ago, but yes I am almost certain that's what I was told. I'm not saying I was given accurate information, the person I was speaking to was more like a low-level assistant rather than a licensed broker. – Derek_6424246 Jan 8 '18 at 21:11
1

The fact that your shares are of a Canadian-listed corporation (as indicated in your comment reply) and that you are located in the United States (as indicated in your bio) is highly relevant to answering the question.

The restriction for needing to be a "qualified institutional buyer" (QIB) arises from the parent company not having registered the spin-off company rights [options] or shares (yet?) for sale in the United States.

Shares sold in the U.S. must either be registered with the SEC or qualify for some exemption. See SEC Fast Answers - Securities Act Rule 144. Quoting:

Selling restricted or control securities in the marketplace can be a complicated process. This is because the sales are so close to the interests of the issuing company that the law might require them to be registered. Under Section 5 of the Securities Act of 1933, all offers and sales of securities must be registered with the SEC or qualify for some exemption from the registration requirements. [...]

There are regulations to follow and costs involved in such registration. Perhaps the rights [options] themselves won't ever be registered (as they have a very limited lifetime), while the listed shares might be? You could contact investor relations at the parent company for more detail. (If I guessed the company correctly, there's detail in this press release. Search the text for "United States".)

1

An option gives you the legal right to buy stock. However, you cannot exercise a stock option unless you have the ability to buy the stock. In the United States, securities not fully registered with the SEC for public sale cannot be purchased except by qualified investors.

0

Accredited investors are required to have 1 million in assets (not including primary residence) or $200,000/yr income for the last 3 years. These kinds of regulations come from the SEC, not the company involved, which means the SEC thinks it's a risky investment.

If I recall correctly, [someone I know] had to submit evidence of being an accredited investor to trade options on [his] IRA. It may be that this is related to the classification of the options.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.