Unrestricted stock in a public company is issued and outstanding stock that is trading openly in the market, and can be bought by the issuing company in a stock buy-back. For a private company, stock that has been held by stockholders for long enough to come off restriction, but has not been registered with the Securities and Exchange Commission (SEC), can be repurchased. Since stock in a private company is illiquid, there are generally shareholders who are anxious to liquidate their positions.
The reasons a company buys back stock include lessening the dilution of ownership by lowering the number of shares outstanding, raising the per share price of the stock and improving the company's image of financial strength. Most companies undertake a share buy-back, or repurchase, when earnings have been particularly strong. The ideal time for a company to do a stock buy-back is during a recession, when the markets are weak and its stock price is depressed. If the company has strong earnings during such a period, a stock buy-back will attract a lot of good attention.
Federal Regulatory Concerns
The Securities Exchange Act of 1934 prohibits anyone, particularly the issuing company and its agents, of manipulating stock prices creating actual or phantom trading in the stock or by raising or depressing its price. It is also prohibited to use any manipulative or deceptive strategy, event or announcement to move stock prices, that SEC rules prohibit. A violation is easy to accidentally create, is extremely serious and can result in a prison sentence, so most issuing companies and associates of the issuing company seeking to buy shares, hire an investment banker experienced in stock buy-backs, tender offers and employee stock ownership plan purchases to handle the entire stock purchase program.
An issuer may not purchase stock in the day’s opening transaction for the security. Most larger issuers may not trade the stock within 10 minutes prior to the close of trading in any market in which the security trades. Small issuers, with under $1 million in daily trading volume or less than $150 million in market capitalization, must complete their transactions 30 minutes prior to the close of the day's trading. It is also vital that no transactions take place in a stock during a time when important information, which can be expected to affect the stock price, is about to become public.
To maintain compliance with SEC rules and regulations, issuers are required to report the total number of shares they repurchase, the average price paid per share, the number of shares purchased as part of a publicly announced share repurchase and the maximum number of shares that may be purchased in the future. These reports are to be made in the quarterly report on Form 10-Q, the annual report on Form 10-K or, for foreign issuers, Form 20-F, which are fully explained and available on the SEC's website.
- Comstock/Comstock/Getty Images