What is Letter Security?

Also known as letter stock or a letter bond, a letter security is a stock or bond that is not registered with a governmental regulatory agency. In the United States, this means any security that is not registered with the Security and Exchange Commission. Securities of this type are typically not eligible for sale in the marketplace, requiring sellers and buyers to utilize other avenues for trading these types of investment opportunities.

There are several different methods that may be used to manage the purchase or sale of a letter security. One of the most common methods is arranging the transaction as part of the private placement of shares of stock which are part of a merger between two companies or the buyout of one business by another. Typically, this type of activity would occur at some point prior to the initial public offering or IPO for the stocks issued by the new unified company. In situations of this type, the letter security may be known as a restricted security, identifying the fact that the private placement is not subject to the same requirements as the shares that will later be offered to investors in general, once the company files the proper paperwork with the governmental regulatory agency.

Employees may also receive a letter security as part of a compensation package. In this scenario, the shares of stock may be issued as part of a merit program, with so many shares added to the employee’s account each year as the result of compliance with specific requirements related to workplace performance. At other times, the amount of letter security may be based on the annual earnings of the employee, with so many shares deposited into the employee account each year. This approach is sometimes used as a means of vesting the employee in the company, creating a nest egg that can be drawn upon after retirement.

The actual value of the letter security will depend on the same factors that impact the issue of stocks and bonds in general. This means that the terms and conditions related to the acquisition of the security are important for the recipient, as is the financial stability of the company issuing the security. There may be restrictions on when the investor is allowed to sell the shares or bonds, as well as certain rights in the event that the issuing company closes its doors at some point in the future. As with any investment opportunity, investors should be familiar with all the terms and conditions associated with holding the security and be prepared to make use of it in whatever manner will generate the greatest degree of benefit.