What is forfeiture?
In general, when you forfeit something, you lose your right or privilege to it. Forfeiting your right to own something usually happens when you don’t meet the qualifications. It is the same with investing. The minute you fail to meet the terms of purchase for a company’s shares, you lose or forfeit the right to own a company’s shares.
When it comes to protecting your investments, it pays to know what the expectations are. These requirements usually include paying an allotment or “call money,” or avoiding selling and transferring shares during a restricted period. Abide by these rules, and you get to keep your stock. Disobey them, and you forfeit the right to own a company’s shares.
When a share is forfeited, you no longer owe any remaining balance, and you are required to surrender any potential capital gain on the shares. The shares also become the property of the issuing company. Knowing the grounds of forfeiture before diving into the world of investing will save you from the heartache of watching your hard-earned shares and capital gains get seized.
Examples of Forfeiture
Let’s review two original cases of forfeiture:
- Sophie agreed to purchase 4,452 shares from Apple. The purchase requires an initial payment of 25%. The requirements also insist that this initial payment should be followed by three subsequent installments, or what is also known as call money. While Sophie diligently paid the initial fee as well as the first two installments, she wasn’t able to pay the last part. At this moment, Apple seizes the 4,452 shares. Also, she loses the money she gave in earlier installments. She is given another date to fulfill the payment, but she fails to do so. This time, she has forfeited her shares back to the company.
- Luke acquires restricted securities, which are not allowed for resale in a public marketplace. He got these through his employee stock benefit plan as compensation for services he rendered to the company. Upon acquiring the securities, Luke also received a certificate stamped with a “restrictive” legend, indicating that he cannot resell the securities unless they are registered with the Securities and Exchange Commission (SEC) or are exempt from registration requirements. However, Luke wants to sell his restricted stock, and being the impatient man that he is, he disobeys the rules. Luke sells his restricted securities in the marketplace without doing his research and finding grounds for exemption. His impatience cost him his shares to the company, leaving him with nothing but a whole lot of regret.
How does forfeiture affect investing?
Specific rules are in place by regulatory bodies for a reason. When it comes to investing, there is little we can do to bend these rules in our favor, which is why it’s imperative to be aware of them and the consequences of not abiding by them. In this case, blissful ignorance can lead to forfeiture of shares, which is a distressing experience on the part of the investor.
So, it’s best always to read (yes, including the fine print) before you agree to anything. Take note of the purchase requirements or any restrictions to sell. Remember when you are supposed to pay the installments or call money and pay them promptly.