Non-recourse stock loan: what it is and how it works

A non-recourse stock loan is a loan secured only by your shares. You transfer the shares to the lender’s custody account, receive cash (typically 30 to 50% of their market value), pay interest each quarter, and get the shares back when you repay. If the stock falls 25% below where the loan closed and you choose not to top up, the lender keeps the shares, you keep the cash, and you owe nothing further.

It is one of several ways to borrow against shares you own. The terms below are those of the lender Goldwyn Capital works with, an independent US family office that has made non-recourse stock loans since 2006.

What does non-recourse mean?

The IRS divides debts into two types. A recourse debt “holds the borrower personally liable,” and the lender can generally keep collecting after it has taken the collateral, for example by garnishing wages or levying accounts. A nonrecourse debt “does not allow the lender to pursue anything other than the collateral.”

In a non-recourse stock loan, the collateral is your shares and nothing else. You sign no personal guarantee, and the lender has no claim on your home, your savings or your wages. The most you can lose is what you put into the loan: the shares you pledged, anything you add to top them up, and the interest and fees you pay along the way.

How does a non-recourse stock loan work?

1. You ask for terms. You can request terms with the ticker, the number of shares and how you hold them, and indicative terms come back within one business day. Goldwyn Capital prepares your file for the lender, which makes the credit decision and funds the loan.
2. The lender looks at the stock. It typically needs to trade around 100,000 shares a day or more, and the shares must be free trading, eligible for resale under Rule 144, or registered. The 4.99% ceiling and the rest are explained in what decides the loan amount.
3. You agree the terms. The term sheet sets the loan amount and the rate and lists any fees, and you sign the loan documents.
4. You transfer the shares to the lender’s custody account, where they stay for the life of the loan.
5. The lender funds the loan, typically within 7 to 10 business days.
6. You pay interest every quarter, at 5 to 7% a year, simple and fixed for the term.
7. You repay, and the shares are returned. The term is three years. You can repay from month 24, and a penalty applies before that.

What happens if the stock falls?

If the stock falls 25% below the level the loan closed at, you get an equity call and 5 to 10 business days to decide what to do. You can top up the position with cash, stock or other securities, and the loan continues. Or you can choose not to. Then the loan closes: you keep the cash you borrowed, the lender keeps the shares, and you owe nothing further.

If you think you might top up one day, ask before you sign how the extra cash or securities are treated and whether they come back to you when you repay.

The equity call is the walk-away point the terms spell out in advance. For anything else, such as a late interest payment or deciding at the end of the term not to repay, the loan agreement says what happens, so read those clauses before you sign.

Why is there no credit check or personal guarantee?

The shares are the only thing securing the loan, so the lender’s decision rests on them: how heavily the stock trades, whether the shares can be resold, and how large a block of the company the lender would be taking. Nothing else you own stands behind the loan, so there is no credit check and no personal guarantee.

What does a non-recourse stock loan cost?

The main cost is interest at 5 to 7% a year. It is simple interest at a fixed rate, so the payment is the same every quarter. Any fees are listed on the term sheet, and repaying before month 24 brings a penalty, so ask what both come to.

Say you hold 300,000 shares of a stock that trades well above 100,000 shares a day, and the loan closes with the stock at $5.00. The lender offers 40% at 6%.

If you repay at the end of the term, you pay back the $600,000 and the 300,000 shares are returned to you, having paid $108,000 in interest plus any fees.

If the stock falls to $3.75 and you choose not to top up, the loan closes. You keep the $600,000, the lender keeps the 300,000 shares, and you owe nothing further. The interest you paid up to that point is gone.

What does title transfer mean for you?

Your shares leave your account. They sit in the lender’s custody account for the life of the loan, and title can transfer to the lender, so don’t assume you are still the legal owner while the loan is open. You can’t sell them through your own broker in the meantime. They are returned when you repay, and if the stock has risen by then, you benefit on the terms written into your term sheet.

It also means you are relying on the lender. In its investor alert on non-recourse stock loan programs, FINRA warned that once you transfer the stock, the lender “then has total control over it,” and that “some lenders sell the stock almost immediately.” In 2015 the SEC settled charges against a company that presented itself as a stock-based lender; according to the SEC, it began selling the collateral shares from each loan, on average, three days before closing and funding the loan.

So ask what the lender is allowed to do with the shares during the loan, and who votes them and receives any dividends while it holds them. The guide to checking a stock loan lender covers what else to verify.

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 tax advice.

Who is a non-recourse stock loan for?

It tends to fit if:

• Most of your net worth is in one stock, you need cash for something specific, and you want to know in advance the most you can lose.
• Your broker won’t lend against the stock, or offers very little, because it is a small cap, microcap or OTC name. Here is why brokers turn these stocks down.
• Your shares are listed outside the US, or you hold a foreign company listed in the US. Shares on 52+ exchanges worldwide are accepted.

It is a poor fit if:

• The stock trades under about 10,000 shares a day.
• You may want to sell the shares during the next two to three years, or expect to repay within the first 24 months, when a penalty applies.
• You are an officer or director and your shares aren’t registered for resale, or your company’s insider trading policy restricts pledging. Section 16 filers should also expect to report the loan on Form 4, so confirm that with your company’s counsel. The checklist for officers and directors covers the rest.
• Your stock is large and heavily traded, your broker will lend against it, and you are comfortable with how a margin loan behaves when the price drops.

What to watch out for

Before you sign, go through the documents for these:

• What counts as a default besides the equity call, and what happens if one occurs.
• The full cost: the interest, every fee on the term sheet and the early repayment penalty.
• Any limits on how you use the money. If you plan to buy securities with it, raise that early. FINRA notes that loans secured by most stock “are generally considered margin loans,” and that Federal Reserve regulations restrict the use of the proceeds, “including limiting the purchase of securities with the proceeds.”

Have your own lawyer read the loan agreement, and your tax adviser look at the structure, before any shares move.

Common questions

Do you still own the shares during a non-recourse stock loan?

The shares sit in the lender’s custody account for the life of the loan and title can transfer, so don’t assume you remain the legal owner. They are returned when you repay.

What happens if the stock goes up?

You benefit from a rise in the stock when you repay, on the terms written into your term sheet. You can repay from month 24, with a penalty before that.

Can you walk away from a non-recourse stock loan?

Yes, at the equity call. If the stock falls 25% below the level the loan closed at and you choose not to top up within 5 to 10 business days, the loan closes and you owe nothing further. For other situations, the loan agreement sets out what happens.

How much can you borrow against your stock?

Typically 30 to 50% of the shares’ market value, more for heavily traded stocks, for a loan between $50,000 and $5 million depending on the size of the position. The lender can take at most 4.99% of a company’s outstanding shares.

Are non-recourse stock loans safe?

That depends heavily on the lender, because it holds your shares. FINRA’s investor alert describes the third-party lenders in these programs as “generally unregistered and unregulated” and says there is “no assurance” they will be able to return the stock at the end of the loan. Before you sign, find out who the lender is and where your shares will be held.