Company
What stops a company from selling unlimited stock to the public?
what stops a company from selling a lot of stock to the public? (lets say this company is really popular and lots of people want to buy their shares of this company, so there is no shortage of buyers in primary and secondary market)? I guess it could devalue the price of the stock, but still, that company would get a lot of money, especially if it sells a huge amount of stock in one shot.
But Jayson, why would that happen? Why wouldn’t a company’s stock appreciate as much?
What stops them? The basic answer is state law, stock market rules and SEC regulation.
When each company is formed, they draw up governing documents, called a charter and bylaws, that dictate how the company is structured and the specific rights of shareholders. The charter specifically states the total number of shares that company may issue. Once a company has issued that total number of shares, they can not, by the laws of the state that they are incorporated in, issue any more.
A company can increase the number of shares authorized, but this will require shareholder approval. Shareholders are not apt to allow companies to drastically increase the number of shares they can issue, as this will dilute the existing shareholder’s stake in the company. What dilute means is that each additional share that is issued will decrease the ownership stake represented by each share – thus shrinking the value of a shareholder’s stake.
Even if a company has a lot of authorized, but unissued shares, a company listed on any of the major US exchanges can not just issue out a load of shares. The exchanges have rules that prevent companies from issuing new shares that would represent 10% or more than the current outstanding shares without shareholder approval. As stated before, shareholders are hesitant to allow a company to dilute their holdings outside of extraordinary circumstances.
The SEC also prevents companies from just continuously issuing out shares as well. The SEC requires companies to register shares before they can be offered for sale in the public markets. This process is usually expensive and lengthy, which will give existing shareholders plenty of time to dump any company’s stock that is planning on undergoing a major dilution.
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