No-par stocks are those where the value of the stocks relies completely on the market, not at all based upon any guaranteed value (the par value) set at the issuance of the stocks. The corporate charter contains specific provisions for par value stocks, noting each stock has a specific value that is the minimum which investors must pay for the stock. For accounting purposes, this value gets credited to the common stock account with any extra earned in selling the stocks being credited to a capital account. If the value of the stocks ever drop below the par value, the corporation becomes liable to the shareholders for the price drop. No-par stocks completely avoid this whole process by having no minimum price or par value at all for the stocks. So, investors completely rely on the market for the value of the shares, and some of the value received for the no-par stocks may be allocated to the capital surplus account which may be used for other purposes like issuing derivatives.
When they first were used, no-par stocks allowed greater flexibility in how corporations may sell their stocks and allowed more resources to be used as they wish since they can be put into capital surplus. However, today, corporations can issue par stock with a penny as its value, essentially avoiding any difficulties with the par value, and most states no longer require strict adherence to capital account versus capital surplus rules, eliminating the financial benefits of a no-par stock. Further, some states like Delaware have tax systems that benefit par value stock.
[Last updated in March of 2022 by the Wex Definitions Team]
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