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.
Holders of assessable shares might have to provide additional funding whenever a company needs more 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 was sold at a discount to face value, but shareholders could be liable for additional capital if the company ran out of money.
- If an investor could not provide funding when the board of directors required it, they would forfeit their assessable stock.
Understanding Assessable Capital Stock
When investors purchase stocks nowadays, 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. This is non-assessable stock, meaning that investors cannot be held liable for more than the price of their investment.
In contrast, assessable capital stock holds the shareholder to liabilities above the amount they have invested, up to the face value of their shares.
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, up to the face value of the stock. 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.
Most companies stopped issuing assessable stock in the 1920s. The last assessable shares were sold in the 1930s.
Risks of Assessable Stock
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.
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 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 of the stock for a certain value and expect the shareholder to deliver the amount.
A company's stock type was always listed in its articles of incorporation so investors knew of the possible future 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 require additional capital to keep the company afloat.
However, the discount of buying assessable stock did not offset the additional risk of having to provide additional capital if the company's coffers ran dry. If investors were unable or unwilling to pay for additional assessments, their stock would return to the company–effectively giving them zero return on the investment they had already paid.
What Is Included in Capital Stock?
Capital stock is the maximum amount of common shares and preferred shares that a company is allowed to issue. Common shares give the owner the right to a dividend and a vote in corporate governance, but they are typically last in line if the company goes bankrupt. Preferred shares have priority for the company's dividends and assets, but they usually do not come with voting power.
What Is the Difference Between Capital Stock and Common Stock?
Capital stock is the maximum amount of common and preferred shares that a company is allowed to issue. For public companies, this number is listed on the balance sheet under "shareholder's equity." Common stock gives the owner the right to vote on corporate governance and receive a dividend. This is different from preferred stock, which is prioritized for receiving dividends but typically does not come with voting power.
What Does Fully Paid and Non-Assessable Shares Mean?
"Fully paid and non-assessable" is a phrase printed on stock certificates to indicate that the original buyer has paid the full price for the shares and that no other obligation is due. This is different from assessable shares, which were sold to investors at a discount. However, the owners of assessable shares could be asked to provide more funding if the company ran into financial trouble.