Basic Terms for Shareholders and Investors
Shareholder and Investor Terminology
If you are thinking of taking your business public with an IPO or if you're an equity investor and want to learn more about certain terminology, you've come to the right place. FindLaw has complied a list of regularly used terms and phrases to help you find out everything from what a proxy agent is to an explanation of a road show. For more information, see our Business Finances section.
Accredited investor. Individual accredited investors must satisfy one of the following standards:
- (a) Have a combined net worth with their spouse in excess of $1,000,000;
- (b) Have individual income for the past two years and a reasonable expectation of income for the current year in excess of $200,000,
- (c) Have joint income with their spouse in excess of $300,000 for the past two years and a reasonable expectation of such income for the current year; or
- (d) Be a director or executive officer of the company.
Analyst. An employee of a broker-dealer who analyzes, without commercial bias, the performance, prospects, and value of stocks and who provides this information to his or her employer and its clients.
Annual meeting. Corporate law and stock exchange rules require public corporations to hold annual shareholder meetings to elect directors and conduct other shareholder business.
Annual report. The annual report is issued yearly by public corporations to its shareholders, and contains the detailed financial and business information required by law.
Blue Sky Laws. Blue sky laws are the individual states' securities laws.
Board of directors. A board of directors is the body responsible for overseeing a company's affairs. Shareholders elect the directors to the board. In turn, directors appoint and oversee officers.
Broker. One who buys and sells securities for others, in exchange for a commission.
Broker-dealer. One who functions as both a broker and a dealer. Most stock brokerages are broker-dealers.
Bylaws. The document that contains the ground rules by which a company is run. Bylaws normally establish such matters as the titles and duties of executive officers, the timing and procedures for board meetings, and the manner for conducting the annual shareholder meeting.
CAO. Chief Accounting Officer, or corporate comptroller. The CAO usually reports to the CEO or CFO.
CEO. Chief Executive Officer, often also the chairman of the board, and sometimes the president. The CEO oversees the company's finances and strategic planning.
CFO. Chief Financial Officer. The CFO is responsible for the corporation's accounting and financial structure and activities. The CFO usually reports to the CEO.
CIO. Chief Information Officer, often called the vice president of management information systems or of data processing.
Charter. The document that creates a corporation, often called the articles of incorporation.
Cheap stock. Stock sold just prior to an IPO at prices "substantially" below the IPO price, i.e. 85 percent or less of the IPO offering price.
CLO. Chief Legal Officer, usually known as the company's general counsel. The CLO usually reports to the CEO.
Dealer. Dealers are entities or individuals in the regular business of buying and selling securities for their own account.
Disclosure laws. Disclosure laws require companies to fully and fairly disclose all material facts relating to a securities offering.
Earnings release/earnings report. Most corporations issue press releases regarding their quarterly and year-end financial results before filing their reports to the SEC, or mailing their annual or quarterly reports.
Fiduciary relationship. A fiduciary relationship exists when a person claims to act in the best interests of, or in behalf of, another, and the other accepts that trust.
Going public. When a privately held company successfully makes a public securities offering.
Information statement. When a stockholder vote is held and management does not solicit proxies, there is no need for a proxy statement. In such instances, before the voting the issuer files with the SEC and provides to shareholders an information statement containing information substantially the same as that found in a proxy statement.
Initial public offering (IPO). A company's first public offering of securities.
Insider trading. "Insider trading" is buying or selling a security while having material, nonpublic information about the security, in breach of a fiduciary duty or other relationship of trust and confidence. Insider trading may also include "tipping" such information, securities trading by the person "tipped," and securities trading by persons who misappropriate such information.
Investment agreement. Some stock sales are exempted from registration requirements. When a company sells unregistered stock to an accredited investor-a "private placement" or "limited offering exemption"-an investment agreement is necessary to transact the sale and to safeguard the company from later challenges to the sale. See "Accredited Investor" and "Private Placement."
Investment banker. An organization that advises companies on their capital structure, helps formulate financial strategies and takeover defenses, consults in major transactions, and participates in underwriting.
Listing. Listing occurs when a security is accepted for trading on a stock exchange. Listings are for specific numbers of shares of equity securities or amounts of debt securities.
Low capital. When a company is preparing for an IPO, securities laws deem that a stock offer is unfair and inequitable to public investors if the company's existing capital is less than 10 percent of the overall offering price of the shares it intends to sell.
Managing underwriter. An underwriter who works on behalf of a syndicate of underwriters to perform such functions as: dealing with the registrant; organizing the securities selling effort; or representing other underwriters in such areas as arranging the allotments of offered securities or appropriate stabilization activities.
Offering. All methods, private or public, by which companies offer or sell securities to investors.
Offering materials. The prospectus and any other communications that are deemed part of the prospectus because the issuer uses them in its effort to sell securities. Issuers must be careful not to make careless communications that may become offering materials while they are in registration. See "Prospectus," "Quiet Period," and "Registration."
Officer. State corporate laws usually define officers as the corporation's president, any vice-president, secretary, and treasurer.
Preliminary prospects. A prospectus circulated before the SEC declares the related securities registration statement to be effective.
Primary offering. When an issuer offers securities for sale.
Private placement. A private placement is a securities sale to an accredited investor of securities which is exempt from registration requirements.
Prospectus. A prospectus is a lengthy informational document forming the legal core of efforts to sell a security. A prospectus is technically any notice, advertisement, letter or other communication, transmitted in any manner, which offers a security for sale or confirms the sale of any security during certain time periods.
Proxy agent. A service used to coordinate proxy matters. The proxy agent coordinates with issuers and clearing agencies, and returns specially prepared proxy cards to issuers on behalf of brokers and their customers.
Proxy. "Proxy" is used in common parlance to mean a proxy card, a proxy power, a proxy statement, or a proxy and is a person who stands in the place of another. In this context, a proxy is a person to whom other people have delegated the power to cast their votes at meeting in accordance with their instructions.
Proxy fight. When two or more groups, of which a corporation's management is usually one, oppose each other concerning a matter to be voted on at a meeting of the corporation's shareholders.
Public offering. Any securities offering resulting in sales to more than thirty-five persons is generally considered a public offering.
Quarterly report. "Quarterly report" refers either to a required SEC filing, or, more commonly, to a quarterly report similar to an abbreviated annual report that a company voluntarily mails to shareholders.
Quiet period. When a company is "in registration"-after a registration statement has been filed but before the SEC has declared it effective-any communication it makes can be deemed part of the prospectus.
Registration. Registration can apply to securities, stock exchanges, brokers, dealers, securities associations, clearing agencies, and other persons and matters regulated by the SEC. Registration most commonly refers to securities registration with the SEC, which comes from the requirement that the company provide potential investors with a prospectus before the company can offer its securities for sale. .
Road show. A promotional effort, usually in connection with securities sales. Underwriters and an issuer's executive officers may tour key cities to meet with invited guests to provide information about the issuer and its pending offering. Road shows are also sometimes conducted in connection with proxy proposals.
Securities and Exchange Commission (SEC). The Commission is the independent, quasi-judicial U.S. government agency responsible for protecting the public against malpractice in the securities and financial markets.
Security. Securities include "notes," "stocks," "bonds," and "debentures," any instrument which might be categorized as an "investment contract," and any other interest or instrument commonly known as a "security."
Shareholder. A person who owns shares in a corporation, often used interchangeably with stockholder.
Shareholder agreement. A contract between all or some shareholders of a corporation, setting out their mutual rights and obligations.
Tippee. A person who receives material nonpublic information from an insider.
Tipper. An insider who discloses material, nonpublic information to an outsider in violation of his fiduciary duty. Trading on a tip may be insider trading.
Tipping. Tipping happens when an insider, intending to give a tippee an advantage in the market, violates his fiduciary duty to the issuing company by deliberately giving inside information to an outsider.
Unequal voting rights. If a company issues more than one class of equity securities, then it is considered unfair to investors if the class of securities offered to the public has either no voting rights or less than equal voting rights.
Voting. Voting at a shareholders meeting is usually done entirely by proxies at the instruction of shareholders.
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