Unissued Shares: The Billion-Dollar Question in Public Companies

Many individuals are curious about the existence of unowned shares within public companies. This article delves into the intricacies of unissued shares, their availability in the market, and where the money from their sale ultimately goes.

Understanding Unissued Shares

When a company is formed, it defines a maximum number of shares it can issue, known as its authorized shares. Not all of these authorized shares must be issued immediately, leaving a pool of unissued shares. These unissued shares represent the company's potential capital, which can be utilized for various business purposes, such as raising more capital, compensating employees, or financing acquisitions.

Authorized vs. Issued Shares

Authorized Shares: This is the maximum number of shares the company is allowed to issue according to its articles of incorporation. For instance, a company might have authorized 50,000,000 shares but issue only 30,000,000 shares. The remaining 20,000,000 are unissued shares.

Unissued Shares: These are the shares that the company has the right to issue but has not yet done so. They are essentially reserved for potential future issuance. These unissued shares can be sold for a variety of reasons, such as raising capital, compensating employees, or acquiring other businesses.

How Can Someone Buy Unissued Shares?

There are two main ways to issue and purchase unissued shares:

Issuance

Public Offering: This occurs when the company decides to make new shares available to the general public. This can be done through an initial public offering (IPO), where shares are sold to investors for the first time, or a secondary offering, where existing shares are again sold to the market.

Private Placement: This is a more exclusive process where the company sells shares directly to venture capitalists or institutional investors, bypassing the broader public market.

Purchase Process

Investors can purchase these unissued shares through stock exchanges or directly from the company during an offering. The exact process depends on the company's decision and the regulatory requirements in place. When a company sells these shares, the money received goes to the company and can be used for strategic purposes like paying down debt, funding operations, or investing in growth initiatives.

Where Does the Money Go?

When unissued shares are sold, the money from the sale goes directly to the company. This capital can be used for a variety of purposes, but the primary uses include:

Financing Operations: Routinely running the business requires funds for salaries, rent, utilities, and other day-to-day expenses. Paying Down Debt: Companies often use the proceeds from new share sales to pay off existing debts, thereby improving their financial health. Investing in Growth Initiatives: The capital from share sales can be invested in research and development, marketing campaigns, or expanding into new markets.

Regulatory Requirements and Corporate Actions

The issuance of new shares is subject to stringent regulations. Companies must disclose any plans to issue new shares to their existing shareholders, as this can potentially dilute their ownership stakes. For instance, during an initial public offering (IPO), the company must comply with SEC (Securities and Exchange Commission) requirements to ensure transparency and protect investors.

Common Shares and Treasury Shares

Much like unissued shares, some companies have unissued common shares known as Treasury shares. These shares are typically not sold to the public but can be reissued in the future. The proceeds from the sale of Treasury shares also go directly to the company.

Mapping Share Ownership

A key point to understand is that not all shares are owned by individuals. Some shares are held by institutional investors, such as mutual funds or pension funds, while others might be owned by the company itself (through Treasury shares). However, there are no unowned shares in a public company. Shares are always owned by someone, even if the ownership is not immediately apparent to the public.

Secondary Offerings and Share Dilution

When a company engages in a secondary offering, it increases the number of shares in circulation. This can reduce the ownership percentage of existing stockholders, a concept known as dilution. Similarly, when a company issues options and those options are exercised, the company often issues new shares, further diluting existing ownership stakes. This is a significant difference between company-issued options and market-purchased call options.

It's important to note that when a person exercises company-granted options or warrants, the shares do not exist until the option is exercised. At that point, the person pays the company, which offsets a tiny amount of the dilution.

Conclusion

While there are shares that no one owns at a specific point in time, these shares can become available for purchase through corporate actions. The proceeds from the sale of these shares go directly to the company and can be used for various strategic purposes. Understanding the dynamics of unissued shares, Treasury shares, and secondary offerings is crucial for investors and stakeholders alike.