When a company issues or registers its share upon incorporation, it has the right (but not the obligation in most states) to assign a minimum value to the stock. This minimum amount is called the par value. A par value or face value is the amount assigned to a corporation stock for accounting purposes. The value of par times the number of shares equal the book value of equity at time of issuance or incorporation and is credited to capital stock account. As a result, a share of a stock in the company can have par or no par value. If a company does not set its par value for the shares, the certificates are issued at no par. A no par stock has no minimum value and value is determined based on what investors are willing to pay for it in the open market.
When a company decides to raise equity capital in the capital markets from investors, it issues shares. If a company has issued the shares with a par value, the par value times the number of shares issued is the minimum capital the company can raise in the markets from investors. The investors will pay the market price which is determined based on demand & supply and the mood and momentum in the market and trading sessions. Hence the no par stock value is determined based on what investors are willing to pay for it in the open market.
Any funding generated by the sale of no par value stocks is credited to common stock account. Any funding generated through the sale of stocks with a par value is distributed between the common stock and paid-in-capital account.
What are the advantages of no par stocks to a corporation?
When a corporation issues stocks at no par value, it has the flexibility to set higher prices at future public offerings.
Due to market volatility, if a stock market price falls below its par value, the company becomes liable to shareholders for the difference between par value and current purchase price.
In addition, when the purchase price is below par value, if a company faces difficulty and cannot meet its financial obligation, the creditors can go after the shareholders for the difference between the purchase price and the par value to collect the unpaid debt.
On the flip side, in case of bankruptcy, stocks with no par value could lead analysts to conclude that the business was not originally fully capitalized.
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