Goldwyn Capital
If you are an officer or director of a listed company and most of your net worth is in its stock, selling some of it is never a private decision. A sale has to fit your company’s trading rules, and it shows up on a Form 4 that anyone can read on EDGAR.
A loan against the shares raises cash without selling on the open market. For an insider, though, there is more to check before you start than there is for an outside shareholder.
Start with your insider trading policy
SEC rules require a public company to disclose whether it has adopted insider trading policies and, if it has, to file them as an exhibit. Read yours again with a loan in mind:
- Look for anything on pledging. Some insider trading policies restrict pledging company stock. Check whether yours bans it, limits it or requires approval first.
- Look at hedging. In the proxy statement for electing directors, the company has to describe its practices or policies on officers, directors and employees hedging against a fall in the stock’s value, with instruments such as prepaid variable forward contracts, equity swaps and collars. If it has none, it has to say so. Whether your company would treat a non-recourse loan as covered by that policy is a question for counsel.
- Check the calendar. If the policy uses trading windows and blackout periods, ask whether pledging or transferring shares to a lender has to happen in an open window, and whether it needs pre-clearance.
Check whether your shares can move to a lender
Rule 144 treats you as an affiliate if you are in a relationship of control with the company, and the SEC’s guide gives executive officers, directors and large shareholders as examples. Shares an affiliate holds are control securities, including shares bought on the open market. Their certificates usually carry no restrictive legend, but an affiliate who sells them publicly under Rule 144 still has to meet its conditions:
- Adequate current public information about the company has to be available.
- In any three months you can sell no more than the greater of 1% of the shares outstanding or, for exchange-listed stock, the average weekly trading volume over the four weeks before you file notice. OTC stock uses only the 1% test.
- Sales have to be handled as ordinary brokerage transactions.
- You file a Form 144 notice if your sales are over 5,000 shares or $50,000 in any three months.
- Restricted shares, such as shares bought in a private placement, also carry a holding period: six months at a company that reports to the SEC, a year at one that does not.
Rule 144 also has a provision for pledged shares. If a lender sells shares an affiliate pledged after a default, for six months its sales count together with the affiliate’s own sales against the same volume limit (a year if the company does not report to the SEC).
In a non-recourse loan the shares are the lender’s only security, and if the loan ends with the lender keeping them, it has to be able to sell them. That is the background to the lender’s rule that officers and directors need shares registered for resale. Shares registered with the SEC for resale can be sold without relying on the Rule 144 exemption. Shareholders who are not insiders can use shares that are free trading, eligible for resale under Rule 144, or registered.
Ask company counsel whether your shares are registered for resale today and, if not, what it would take.
Plan for the reporting
Officers, directors and holders of more than 10% of a class of the company’s securities report their holdings and transactions on Forms 3, 4 and 5 under Section 16 of the Exchange Act. When a Form 4 is required, the SEC says it must be filed within two business days following the transaction date.
If you file under Section 16, expect to report the loan on Form 4. How it is reported depends on how the loan is structured, and company counsel decides that, so give them the term sheet well before closing.
The proxy statement is the second place the loan can show up. The table of shares owned by directors and named executive officers, and by directors and executive officers as a group, has to show by footnote or otherwise how many of those shares are pledged as security. Expect counsel to decide how your loan appears there as well.
Who to talk to first
Before you sign a term sheet or move a share, talk to your company’s general counsel or outside securities counsel. They can answer most of the questions above. If any of your shares carry a restrictive legend, the SEC’s Rule 144 guide notes that the transfer agent won’t remove it without the company’s consent, usually an opinion letter from the company’s counsel.
Company counsel represents the company, so have your own securities lawyer review the loan documents too. Depending on how the loan is structured and where you live, transferring shares to a lender can be a reportable tax event, so talk to a tax adviser before signing. Goldwyn Capital does not give legal or tax advice.
| What to check | Where it is written | Who confirms it |
|---|---|---|
| Pledging, hedging and trading windows | Insider trading policy, proxy statement | General counsel |
| Whether your shares can go to a lender | Resale registration statement, Rule 144 | Company counsel |
| Form 4 and the proxy footnote | Section 16 filings, proxy ownership table | Company counsel |
| Tax | Your own circumstances | Your tax adviser |
How the non-recourse loan works
Goldwyn Capital introduces borrowers to an independent US family office that has made non-recourse stock loans since 2006.
You transfer the shares to the lender’s custody account, where they stay for the life of the loan, and the lender wires you 30 to 50% of their market value, more for heavily traded stocks. Interest is 5 to 7% a year, simple, fixed for the term and paid quarterly. Any fees are listed on the term sheet. The term is three years. You can repay from month 24, with a penalty before that, and the shares are returned when you repay. If the stock has risen by then, you benefit on the terms written into your term sheet.
Non-recourse means the shares are the only thing securing the loan. There is no credit check and no personal guarantee. If the stock falls 25% below the level the loan closed at, you get 5 to 10 business days to top up with cash, stock or other securities. If you choose not to, the loan closes: you keep the cash, the lender keeps the shares, and you owe nothing further.
Say you hold $2,000,000 of your company’s stock, registered for resale, and borrow 40% of its value. You receive $800,000. At 6% simple interest you pay $48,000 a year, in quarterly payments of $12,000.
Loans run from $50,000 to $5MM, depending on the size of the position. The stock typically needs to trade around 100,000 shares a day or more, and under about 10,000 shares a day usually doesn’t qualify. The lender can take up to 4.99% of a company’s outstanding shares, which matters if you are a large holder. Funding takes 7 to 10 business days. Indicative terms come back within one business day of a request, so you can have the numbers in hand when you sit down with counsel.
