Financial Compensation

Financial compensation is the act of giving money or various things of monetary value in return for either their products, or services and in recompense for any injury they have incurred.

There are a few types of compensation and they include:


Damages are usually awarded when one party has received an injury because of the actions of another party, money is paid out to the injured party as compensation. The rules and regulations for damages often differ depending on what type of claim it is. For example a Tort Claim versus a Breach of Contract claim, and where the actual incident took place.

Normally circumstances and under ordinary law, damages are classified into punitive and compensatory.

  • Compensatory damages – are further broken down into “special damages” which could include loss of earnings, property damage, and medical expenses in fact any economic loss.
  • General damages – which may encompass emotional distress, pain, suffering things that are not financial.



Payment is classified as an item given for something of worth from one party, (a person or firm) to another party, normally when the other party has provided a service, given goods or perhaps both. The payment closes the deal and fulfills all legal obligations.

Bartering is the oldest form of payment known to man, this is when one good or service is swapped for another good or service. Nowadays payment can be made not just with goods, you can make a payment using cash, check, credit card, debit card, bank transfer.

When firms trade together the financial process usually begins by an invoice from one party being sent to the other and concluded with a receipt when it is paid in full. However, there are no defining limits what form a payment should take, and it is common in complex business deals that securities are used to fulfil a payment or part payment obligation.

Legally the party making the payment is classed as the “payer” and the party receiving the payment is called the “payee”.


On occasions royalties are sometimes separated into different categories: running royalties or private sector taxes, and is a payment that is made in return for usage.

One party (the licensee) will pay another party (the licensor) for the right to use something he owns normally an asset of some description. This could be intellectual property.

Royalties are typically calculated in a percentage manner that is agreed of revenue for use of the asset or from a fixed cost of something sold. There are other ways and forms of compensation.

A royalty interest gives the right to collect an ongoing stream of revenue for future royalty payments and this method is commonly utilized in mergers and acquisitions. These types of payments are common in such industries as; the music industry, and the oil and gas industry as payment for future revenues gained from the use of an asset or perhaps any revenues from a leasehold, which might have been given by the original owner of the asset.

In the case of a license agreement, it is a legal agreement where the terms and conditions are laid down when an asset or resource such as patents, petrol, gas, trademarks, copyrights are licensed by one party to another.

This is done without any restrictions or limits on term, business or geographic territory, type of produce etc. Licensed agreements are usually regulated and certainly in the case of state or government owned assets. Normally these are private agreements that adhere to standard procedures, but there are certain types of franchise agreements that have similar conditions.

Financial Compensation

As stated earlier restricted stock (letter stock or restricted securities) is the term applied to shares that cannot be sold or bought until all regulatory conditions have been fulfilled, when these conditions are met then the shares may be then traded.

Normally this type of stock is used in rewarding or compensating employees, and usually a transfer agent is engaged. When all of the conditions laid down, (documentation, financial targets, duties fulfilled, goals). Restricted stock is often used instead of stock options in the case of rewarding executives or perhaps private investors due to the favorable tax element and accounting regulations.

Venture companies quite often use restricted securities together with a mixture of stock options and restricted stock. The restricted securities come with a guarantee from the employer that he will grant such securities at a time in the future, then whole ethos of this is to delay a payment and to encourage his employees to perform and meet targets laid down. It also has the extra benefit of the advantageous accounting procedures attached to restricted securities.

Transfer Agents, Business Agents and Intermediaries

Transfer Agents, Business Agents and Intermediaries are all agencies that can aid privately held businesses in buying or selling securities. Their knowledge and skill is sought in many aspects helping to facilitate with; the marketing and all marketing and sales aspects and keeping the identity hidden or the valuation of the firm and its business, facilitating the purchasing meetings and assisting with negotiations with future purchasers and importantly follow the due diligence course.

When an agency is involved in the business of facilitating ownership transactions by a company, on their behalf, of the entity, whether that person is a buyer or seller. The principal and his agents then become the agent of the principal, who is the company’s client. The other party concerned in the transaction, who has no agency relationship with the company, is the agency’s customer.

Regulation D

Summary of Regulation Shares and Regulation D

Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) is a safe harbor rule that defines when an offering of securities would be deemed to come to rest abroad so as not to be subject to the registration obligations imposed under Section 5 of the Securities Act. The General Statement to Regulation D applies a territorial approach to Securities Act registration by providing that offers and sales subject to Section 5 include offers and sales that occur within the United States and do not include offers and sales that occur outside the United States. Regulation D also includes several safe harbor exemptions, 1 addressing specified transactions and is usually coupled with an exemption such as Regulation D and are considered to be restricted or controlled securities.

Each Safe Harbor has two general conditions:

Any offer of sale must begin in an “offshore transaction”. This entails that the seller genuinely believes that the party who is purchasing is out of the county at the time of either the offer or the sale, or that the deal is based in designated foreign stock markets. These markets include the Canadian stock exchanges participating with the committee, and that any transfer or transaction is not made with the prior arrangement and with a purchasing entity in the U.S.

The second condition lays down that no direct marketing or sales activity may be made by the issuer in the U.S. or for that matter any related body to the issuer including an agent, distributor, or affiliate. These activities are for the purpose of preparing the U.S markets for the stock.

Category 1

  • Stocks and shares of an alien issuer for which there is no significant U.S. market interest (as set out below)
  • Securities touted by an alien in offshore directed offerings (as set out below)
  • Debt stock that is non-transferable of a U.S issuer, offered in offshore directed offerings that are in not in U.S dollars.
  • Securities supported by the full faith and credit of an alien government. When this happens only the normal terms above must be satisfied.


Category 2

Equity offerings by reporting alien issuers

The offerings of debt securities and non-convertible, non-participating preferred stock, by reporting issuers or non-reporting alien issuers. This is be classed as a qualified reporting issuer, the issuer has to complete and file all necessary documentation for a minimum period of twelve months before an offer of sale can be issued, or by complying with all reporting commitments.

All constraints on any offers must be obeyed, this includes the exclusion on reselling to U.S citizens within the term of compliance in respect to distribution, including the normal terms and conditions. This normally means a 40 day distribution compliance period (the set period when conditions by its individual category are in power) applies, and will have to be laid down in a formal contract with all distributor parties and transparent in the official offering paperwork and on all acceptance letters sent to the same distributors and anybody getting transaction-based compensation, also to buyers whilst the consent term is valid.

Category 3

Equity by domestic reporting issuers

This occurs when the offerings of equity stock by non-reporting alien issuers for which there is a considerable U.S market interest and the offerings by U.S issuers that are not reporting issuers, in this instance stringent regulations and procedures are in play.

When debt stock is being offered then the same conditions apply as those explained in Category 2, plus the addition of a limited global certificate that supports the distribution period of forty days.

Concerning equity shares, this distribution period is extended to one year, and the buyer has to give a certificate as to its non-U.S status with the security that they undertake not to resell to a U.S resident, except when complying with U.S law, also that they will comply to the conditions applicable to Category 2 and Regulation D.

The stock of a normal non-commercial issuer must show a legend which indicates that the stock is restricted, complete with transfer stop orders. All paperwork and documentation needed must refer directly to the conditions on any hedging dealings during the compliance period of distribution that would have an effect of pre-selling the stock into the U.S. All distributors must give a compliance notification that they accept and observe this condition.

Rule 904 – is set out to give a safe harbor for certain resale transactions by the entities that are not the issuer, say a distributor, or agent and any such affiliate (but not a director or officer who is an affiliate solely by nature of his job) or any persons acting on their behalf. These people / firms are subject to the following conditions.

All entities and permitted sellers are subject to these general rules:

  • Any salesperson or agent thereof who is receiving commissions or payment dictate that a resale cannot be wittingly made to a U.S resident, and the distribution compliance ends.
  • If this is the situation then confirmation detailing all relevant securities regulations and restrictions must be issued to any other firm, dealer or agent receiving financial compensation.
  • Nobody must gain financially other than an officer or director of the issuer.
  • There is no safe harbor for any agents of the issuer, other than that the affiliation is only because of their office.
  • A representative in this case means that it is a party that is controlling, being controlled by or under any control of the issuer.
  • This control, means a de facto control. That is its power comes from voting rights, which often arises at a ten percent level. But other elements may effect this.
  • All dealings and transactions have to be done through a designated offshore trading market, in a transaction not first arranged with a U.S citizen or in any negotiations involving an outside entity when the purchase order is initiated.
  • All dealing must ensure that no contradictions to the Securities Act registration rules take place, including for the purpose of cleansing any transfer restrictions.


Definition of Regulation D

When you either purchase or have possession of restricted stock, and prior to selling them on the open market, they must find a dispensation from the regulator’s rules. This can be done with Regulation D as it allows re-sales of stock securities if certain criteria is met. This following synopsis sets out the criteria that is required to sell restricted stock, it also details how a legend can be removed.

Restricted and Controlled Securities

When you purchase stocks and shares in a private sale that are not registered direct from the issuing firm or their agent then this is classed as a restricted or controlled security. Often these shares are obtained through private placement offerings, Regulation D offerings, employer benefit schemes as a compensation for work achieved, or for providing set up money to the firm. Regulation D(A)(3) identifies what sales produce restricted stock.

Restricted stock are stock that are held by an associate of the issuing entity. An affiliate could be somebody such as a director or major shareholder who has a strong link with the issuing firm. The term “control” means the influence to direct board decisions and the policies of the particular firm concerned, whether by owning a significant amount of stock, or by contract. If you purchase stock from a controlling entity or affiliate you are buying restricted stock, even if they were not so beforehand.

When buying restrictive securities the certificates you receive will have a restricted legend stamped on them. This legend is to show without doubt that the stock is prohibited to be sold in the open market, unless that is they happen to be registered with regulators that are exempt from such ruling and registration regulations. In this case the certificates will not display any legend.

Conditions of Regulation D

The terms and conditions of Regulation D must be satisfied in order to sell restricted or controlled stock. Regulation D is not the only means of selling such securities but it does provide a safe harbor exclusion to sellers. The regulations are listed below:

The Holding Period

Before you sell restricted stock on the open market you need to ensure they have been held for the due period. If the firm that issue the stock happens to be a Reporting Company which means it has satisfied all the reporting regulations according to the Securities Act of 1934, then this time frame is six months.

If the company concerned is not a reporting company then the period is extended to one year. The stock has to be fully paid for before the holding period comes into effect. Only controlled stock is affected in this way. Any stock bought on the open market is not restricted, therefore there is no time limit concerned, or for an affiliate of the company. But as soon as these securities are then once again subject to the rule.

Additional Securities

Any supplementary stock purchased from the same issuer do not in any way affect the securities of the same class that were previously bought. And if you purchased stock from another non-affiliate you can just add this stock onto your holding requirement. Any shares that were given by an affiliate, the time period begins when they were bought and not when they were given as a gift. Stock options are slightly different, the time period starts when the option is taken up and not the date they were given.

Current Public Information

There has to be enough, current data concerning the issuing firm in the public domain before any sales can be made. In the case of reporting firms they they must show that they have abided by the Securities Exchange Act of 1934 and satisfied the relevant reporting regulations. With non-reporting firms certain information must be available to the public, things like the firm’s information, what sort of trade it is involved in, and who all the directors and officers are together with financial information.

Trading Volume Formula

The Trading Volume Formula regulates the number of securities that can be sold in any three month period, and the formula states that they cannot be more than 1% of any outstanding stock of the same type being sold, of if the category is listed on a stock exchange, then the greater of 1% or the averaged reported weekly trading volume before the four weeks preceding the filing of notice of sale on Form 144. Over-the-counter securities, including those quoted on the OTC Bulletin Board and the Pink Sheets, must only be sold using the 1% rule.

Ordinary Brokerage Transactions

In the case of an affiliate, all sales must be carried out as routine normal activity, and no extra payments or commissions can be paid out to anybody including agents or brokers. Neither party can canvass orders to purchase the stock.

Even after satisfying all the conditions laid out in Regulation D, no controlled stock may be publically sold, unless the legend is first taken off the certificate. This may only be done by utilizing a transfer agent, and even then it can only be removed after there has been a letter of consent from the the issuers legal representative. If no such letter is forthcoming the transfer agent has no authority to act, and therefore there can be no sale, having said this there may be exceptions for acquisitions, mergers and liquidations.

To commence any removal process concerning legends, the investor should use the issuing broker, or the transfer agent, to investigate about the processes of the. This can be a complicated and legal practice involving fees payable prior to any form of sale, this is usually carried out with legal representation or a specializing company familiar with United States Securities law.

When a situation comes about if a legend can be taken off, the regulator will not step in. This removal of legend is for the sole concern of the issuer of the stock. State legislation, and not federal law decides the matter of any disputed arising on removal of legends. In such cases, the regulator will take no action in any such dispute.

The following definitions are integral to an understanding of Regulation D.

“U.S. Persons”: For individuals, based largely on residence, rather than nationality. Entities have residence largely based upon where they are formed, with the exception of identifiable branches of entities, which may themselves be treated as the equivalent of separate organizations. Accredited investors can form an offshore entity that will be treated as a non-U.S. Person for this purpose. Detailed rules govern trusts and estates, and other professional fiduciaries, which are designed to mitigate disadvantages to U.S. professional fiduciaries by ensuring that, subject to certain conditions, offers to them for the account of non-U.S. Persons will not trigger Securities Act Registration, despite the making of an offer to the fiduciary in the United States.
“Substantial U.S. Market Interest” or “SUSMI”: Present with respect to a class of equity securities if (i) U.S. securities exchanges and NASDAQ in the aggregate constituted the single largest market for such class of securities in the issuer’s prior fiscal year, or (ii) 20 percent or more of trading in the class equity securities during such period occurred in such U.S. markets and less than 55 percent of trading in such securities took place during that period through the facilities of the securities markets or a single foreign country. Separate SUSMI rules apply in the case of debt securities.
A “foreign issuer” is a foreign organized entity other than such an entity that has more than 50 percent of its voting securities being held by U.S. residents and either (i) the business of the company is administered principally in the U.S., (ii) 50 percent or more of its directors or executive officers are U.S. residents or (iii) more than 50 percent of its assets are located in the United States.
“Overseas Directed Offering”: An offering by a foreign issuer directed into a single country other than the United States to the resident’s thereof in accordance with the local laws and customary practices and documentation of such country
“Offering Restrictions Offering”: Offering restrictions require each distributor to agree in writing that all offers and sales of the securities prior to the expiration of the distribution compliance period (a) shall be made only (i) in accordance with the provisions of the applicable safe harbors, (ii) pursuant to registration of the securities under the Securities Act, or (iii) pursuant to an available exemption from the registration requirement of the Securities Act and (b) for offers and sales of equity securities of domestic issuers not to engage in certain prohibited hedging transactions prior to the end of the distribution compliance period. The offering restrictions also require that all offering material and documents (other than press release) used in connection with offers and sales of the securities prior to the expiration of the distribution compliance period must include statements to the effect that the securities have not been registered under the Securities Act and may not be offered or sold in the United States or to U.S. persons (other than distributors) unless the securities are registered under the Securities Act or an exemption from the registration requirements of the Securities Act is available., and in the case of equity offerings by domestic issuers, statements concerning the hedging prohibition. Such statements should appear (i) on the cover or inside cover page of any prospectus or offering circular used in connection with the offer or sale of the securities, (ii) in the underwriting section of any prospectus or offering circular used in connection with the offer or sale of the securities, and (iii) in any advertisement made or issued by the issuer, any distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. Such statements may appear in a summery form on prospectus cover pages and in advertisements. Broker-dealers must ensure that they are not unlawfully effecting distributions of Canadian securities in the United States in violation of Regulation D and other U.S. securities law requirements. This may result, for example from purchases of small cap issues by foreign accounts from the issuer, a promoter or affiliated entity.

When bringing Regulation D into the equation or some other exemption to resell into U.S markets for reasons of effecting distribution. Such dealings may prove to be in violation of the offer of the sale of the stock, and when marketing is carried out by the issuer or distributor, any of their affiliates, or agents acting on bequest of any of the aforementioned. Such information may appear in summary sheets in prospectus cover pages and in marketing.

Brokers and dealers must comply and ensure they are not breaking any laws concerning the distributions of Canadian stock into the U.S which would fall foul of Regulation D and other U.S securities laws and regulations.

This could result by buying small cap issues by alien accounts from the issuer, a promoter, or any affiliated agent using Regulation D or some other supposedly mechanic for resale into the U.S for the purpose of effecting any distribution. Such behavior may contravene the regulation rules of the Securities Act and have dire consequences.