What Is Assessable Capital Stock?
Assessable capital stock is capital stock that could subject shareholders to liabilities above what they paid for their shares. Assessable capital stock stands in contrast to non-assessable capital stock, where shareholders can only lose the amount they invested. The liability assessment above the value paid for assessable capital stock takes place whenever a company needs additional capital or in the event of bankruptcy or insolvency. Assessable capital stock, however, is no longer issued as all stock is now non-assessable.
- Assessable capital stock is the capital stock of a company that subjects shareholders to further possible liabilities.
- A common form of stock issuance in the 19th and early 20th century, assessable capital stock is no longer issued.
- Non-assessable capital stock is how stocks are issued today, whereby shareholder loss is limited to only the amount they invest.
- Assessable capital stock is issued to investors at a discount to face value and they are liable for further capital commitments from the issuing company whenever additional capital is needed or during insolvency or bankruptcy.
Understanding Assessable Capital Stock
When investors purchase stocks in companies the only risk they face is the loss of the amount they invest. For example, if an investor buys $1,000 worth of Company ABC stock and the company's share price falls to zero, their total and only amount of loss would be $1,000. Nothing more. Assessable capital stock holds the shareholder to liabilities above the amount they have invested.
Assessable capital stock is a type of assessable stock that is issued as part of a primary offering. This class of equities would be issued to investors by companies at a discount to face value with the understanding that the company may come back to investors for more money at a later date.
For example, if Company ABC's stock was trading at $20, ABC would offer the stock to some investors at a discount for $15; however, this would come with the stipulation that ABC may return to them with a request for further funds. This is usually referred to as the investors being held to a call during insolvency and bankruptcy proceedings or when a company needs additional capital to fund growth or make an acquisition.
Assessable capital stocks were a common type of stock issuance in the 19th century and early 20th century but no longer exist. As securities are now non-assessable, companies that need to raise additional capital may issue additional stock or bonds instead. During insolvency, a company's assets are sold off and creditors are paid back in order of seniority. Those that are not paid back because the assets don't cover all liabilities suffer a loss.
History of Assessable Capital Stock
It is generally considered that all stocks were assessable stocks during the 19th century and that companies shifted from this practice to non-assessable stocks approximately within 10 years of World War I. At this time it appears that the assessable nature of stocks did not apply to bankruptcy and insolvency cases but rather whenever the board of directors decided they needed extra capital. The board would simply make an assessment on the stock for a certain value and expect the shareholder to deliver the amount.
Of course, assessable capital stock left shareholders open to significant financial risk in that they would never be aware of how much additional capital they would be called for or when. If an individual did not have the additional funds needed they then would automatically default on the stock and forfeit ownership, resulting in a loss of their initial investment. It is not difficult to see why stocks eventually transitioned to being non-assessable as it reduced the financial risk for investors. This in turn helps companies as well as it makes buying stock more attractive.
A company's stock type was always listed in its articles of incorporation so investors knew of the possible future financial liability. Assessable capital stock was popular with mining companies, particularly since mining is capital intensive and requires a good deal of financing. Furthermore, if significant mineral reserves are not uncovered, a mining company could be in difficult financial straits, requiring additional capital to keep the company afloat.