Equity Characteristics

Everything on owning stock, on one sheet: rights, resale rules, dividends, and the two employee stock options the exam loves to compare.

Which One-Liners Win Points?

• Preemptive (antidilution) rights let existing holders buy new shares first, protecting both voting power AND ownership percentage; they must be written into the corporate charter.
• Restricted securities come from unregistered deals (private placements, compensation); control securities are held by affiliates (officers, directors, or 10%-plus owners), however acquired.
• Incentive Stock Options (ISOs) go only to employees; Non-Qualified Stock Options (NQSOs) can go to anyone the company designates.

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

• Volume limit is the GREATER of 1% of outstanding or average weekly volume, not the lesser.
• The 5,000-share / $50,000 figure is the Form 144 filing trigger, not the sales ceiling; the ceiling is the volume formula.
• ISOs have no regular income tax at exercise, but the spread IS an Alternative Minimum Tax (AMT) preference item. Read whether the question asks about regular tax or AMT.
• Stock dividends adjust cost basis per share but not total cost basis; your total investment value stays the same.

What Rights Do Shareholders Have?

• One vote per share on directors, mergers and acquisitions, charter amendments, and stock splits.
• Cumulative voting = shares times open seats, concentrate on one candidate (minority-friendly). Statutory (straight) voting = one vote per share per seat, voted separately, no pooling across seats (majority sweeps).
• Preemptive rights keep your proportional ownership; notice plus a defined window (often 10 to 30 days) to exercise. Not automatic; charter must grant them.

How Do Restricted Stock Resales Work?

• Restricted stock is unregistered (Regulation D private placements, compensation plans), so it cannot trade freely until holding periods and conditions are met.
• Holding period begins when the securities are fully paid for: 6 months for a reporting issuer (files periodic reports), 12 months for a non-reporting issuer.
• QIB resale safe harbor: resell restricted securities to Qualified Institutional Buyers with no holding period, no volume limits, and no SEC filing; QIB owns and invests at least $100 million ($10 million for broker-dealers). Securities cannot be of the same class as any listed on a national exchange.

How Do the Dividend Dates Work?

• Declared by the board of directors; never guaranteed; a return of corporate profits.
• Four dates: Declaration (board announces), Ex-dividend (exchange sets; first day a buyer does NOT get the dividend), Record (holders on record qualify), Payment (paid out). Under T+1 settlement the ex-date is the same day as the record date when that date is a business day.
• Buy before the ex-date to receive the dividend; the price typically drops by the dividend amount on the ex-date.

How Are Employee Stock Options Taxed?

• ISOs (employees only): no tax at grant or exercise for regular tax; qualifying sale is all long-term capital gain; the exercise spread is an AMT preference item; no employer deduction on a qualifying disposition (a disqualifying disposition can produce one).
• NQSOs (anyone the company designates): generally no tax at grant (assuming no readily ascertainable fair market value); the spread (market price minus exercise price) is ordinary income at exercise; later appreciation is capital gain; no AMT; employer deducts the ordinary income.

What Is the Memory Aid for Dividend Dates and Option Holds?

• Dividends are discretionary before declaration, and a corporate liability after it. The board has no obligation to declare one, but once declared it cannot be rescinded.
• DERP: Declaration, Ex-dividend, Record, Payment. The board Declares, the Exchange sets the ex-date, Record determines eligibility, then Payment goes out. Only the ex-date is set by the exchange.

One-Breath Recap

Common shareholders vote (cumulative stacks shares times open seats for the minority; straight favors the majority), hold preemptive rights, and stand last in liquidation. Restricted and control stock need 6 months for reporting issuers, 12 for non-reporting, affiliates keep volume limits (greater of 1% outstanding or average weekly volume) and Form 144, and the qualified institutional buyer safe harbor waives it for $100 million buyers. Dividends run declaration, ex-dividend, record, payment; the exchange sets the ex-date and price drops by the dividend. Incentive stock options go only to employees: no regular tax at exercise, an alternative minimum tax preference, a two-year grant, one-year exercise hold. Non-qualified stock options go to anyone, tax the spread as ordinary income at exercise, and earn an employer deduction an incentive stock option yields only on a disqualifying disposition.

Need more than the recap? Read the full Equity Characteristics unit.