Assessable Capital Stock

What Is Assessable Capital Stock?

Assessable capital stock is capital stock that could subject shareholders to liabilities above what they paid for their shares. Assessable capital stock stands in contrast to non-assessable capital stock, where shareholders can only lose the amount they invested.

Holders of assessable shares might have to provide additional funding whenever a company needs more capital or in the event of bankruptcy or insolvency. Assessable capital stock, however, is no longer issued as all stock is now non-assessable.

Understanding Assessable Capital Stock

When investors purchase stocks nowadays, the only risk they face is the loss of the amount they invest. For example, if an investor buys $1,000 worth of Company ABC stock and the company's share price falls to zero, their total and only amount of loss would be $1,000. This is non-assessable stock, meaning that investors cannot be held liable for more than the price of their investment.

In contrast, assessable capital stock holds the shareholder to liabilities above the amount they have invested, up to the face value of their shares.

Assessable capital stock is a type of assessable stock that is issued as part of a primary offering. This class of equities would be issued to investors by companies at a discount to face value with the understanding that the company may come back to investors for more money at a later date.

For example, if Company ABC's stock was trading at $20, ABC would offer the stock to some investors at a discount for $15; however, this would come with the stipulation that ABC may return to them with a request for further funds, up to the face value of the stock. This is usually referred to as the investors being held to a call during insolvency and bankruptcy proceedings or when a company needs additional capital to fund growth or make an acquisition.

Assessable capital stocks were a common type of stock issuance in the 19th century and early 20th century but no longer exist. As securities are now non-assessable, companies that need to raise additional capital may issue additional stock or bonds instead. During insolvency, a company's assets are sold off and creditors are paid back in order of seniority. Those that are not paid back because the assets don't cover all liabilities suffer a loss.

Risks of Assessable Stock

Assessable capital stock left shareholders open to significant financial risk in that they would never be aware of how much additional capital they would be called for or when. If an individual did not have the additional funds needed they then would automatically default on the stock and forfeit ownership, resulting in a loss of their initial investment.

It is not difficult to see why stocks eventually transitioned to being non-assessable as it reduced the financial risk for investors. This in turn helps companies as well, as it makes buying stock more attractive.

Special Considerations

It is generally considered that all stocks were assessable stocks during the 19th century and that companies shifted from this practice to non-assessable stocks approximately within 10 years of World War I. At this time the assessable nature of stocks did not apply to bankruptcy and insolvency cases but rather whenever the board of directors decided they needed extra capital. The board would simply make an assessment of the stock for a certain value and expect the shareholder to deliver the amount.

A company's stock type was always listed in its articles of incorporation so investors knew of the possible future liability. Assessable capital stock was popular with mining companies, particularly since mining is capital intensive and requires a good deal of financing. Furthermore, if significant mineral reserves are not uncovered, a mining company could require additional capital to keep the company afloat.

However, the discount of buying assessable stock did not offset the additional risk of having to provide additional capital if the company's coffers ran dry. If investors were unable or unwilling to pay for additional assessments, their stock would return to the company–effectively giving them zero return on the investment they had already paid.