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Is it legal to seek a loan against locked up public stock?

by perfmode 8y ago

what_ever 8y ago
Yes...? It's up to the bank to evaluate its options.
jaggederest 8y ago
At least when I had stock in a lock up, it was not. Loan against stock is effectively a sale.
- usaar333 8y ago
  A loan is nothing like a sale because you still take on all the asset risk. At most, a non recourse loan gives a slight hedge which isn't selling either. (You don't realize capital gains when you take loans or hedge a security) Some market standoff agreements might prohibit using stock as collateral, but plenty don't. I chatted with an ibank willing to lend me money against locked out shares to buy a home with.
  - jaggederest 8y ago
    At least when I was in that situation, people were absolutely willing to loan me money, but I consulted a securities lawyer and they said the terms of the lockup agreement prohibited any loan against the value, hedge, agreement to sell, collateralizing, or anything that might in any way look like a sale or attempt to offset the risk, full stop. So yes, ibanks will loan you money, because they don't care if you violate the lockup agreement. This should probably not be surprising, and it's buyer beware if you do.
    - usaar333 8y ago
      How was your lockup agreement phrased? If it's something like this one (https://blog.wealthfront.com/post-ipo-dilemma-hedging-stock/ https://blog.wealthfront.com/post-ipo-dilemma-hedging-stock/), where you have clauses like " enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock or such other securities" exist, I agree using as loan collateral is pushing the limits, if not past it. Many companies have much simpler language. Mine was just "will not sell or otherwise dispose of shares", which permits not only loans, but more powerful techniques like hedging.
patio11 8y ago
Typically a bank mortgage would be secured by the property, not by other assets of the purchaser. Some (but not all) stocks / options might be restricted from being pledged/liened/hypothecated/etc, so they might not be available for “Loan me $5 million (to buy a house), secured by these shares.” But because the bank is in the business of making mortgages against property, it won’t consider the shares as security in most cases. It may consider them as positive evidence in favor of one’s ability to service a mortgage, much like it would consider your income as evidence of ability to service the mortgage. It doesn’t have recourse against your income in event of a default. (California is a no-recourse stage; talk to a real estate lawyer or similar professional if you are curious on the precise application to your situation, HN.)
- bm1362 8y ago
  I’m literally buying a home now, with vested-not-liquid Uber RSUs and the lender would not honor them as assets.
karlakush 8y ago
Legal? Maybe, I'm not sure. It will certainly be prohibited by company policy, though. The reason why is because if you default on the loan, the bank could force you to sell your shares prior to the lock-out period ending in order to recoup their losses.

Is it legal to seek a loan against locked up public stock?

what_ever 8y ago

Yes...? It's up to the bank to evaluate its options.

jaggederest 8y ago

At least when I had stock in a lock up, it was not. Loan against stock is effectively a sale.

usaar333 8y ago
A loan is nothing like a sale because you still take on all the asset risk. At most, a non recourse loan gives a slight hedge which isn't selling either. (You don't realize capital gains when you take loans or hedge a security) Some market standoff agreements might prohibit using stock as collateral, but plenty don't. I chatted with an ibank willing to lend me money against locked out shares to buy a home with.
- jaggederest 8y ago
  At least when I was in that situation, people were absolutely willing to loan me money, but I consulted a securities lawyer and they said the terms of the lockup agreement prohibited any loan against the value, hedge, agreement to sell, collateralizing, or anything that might in any way look like a sale or attempt to offset the risk, full stop. So yes, ibanks will loan you money, because they don't care if you violate the lockup agreement. This should probably not be surprising, and it's buyer beware if you do.
  - usaar333 8y ago
    How was your lockup agreement phrased? If it's something like this one (https://blog.wealthfront.com/post-ipo-dilemma-hedging-stock/ https://blog.wealthfront.com/post-ipo-dilemma-hedging-stock/), where you have clauses like " enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock or such other securities" exist, I agree using as loan collateral is pushing the limits, if not past it. Many companies have much simpler language. Mine was just "will not sell or otherwise dispose of shares", which permits not only loans, but more powerful techniques like hedging.

patio11 8y ago

Typically a bank mortgage would be secured by the property, not by other assets of the purchaser. Some (but not all) stocks / options might be restricted from being pledged/liened/hypothecated/etc, so they might not be available for “Loan me $5 million (to buy a house), secured by these shares.” But because the bank is in the business of making mortgages against property, it won’t consider the shares as security in most cases. It may consider them as positive evidence in favor of one’s ability to service a mortgage, much like it would consider your income as evidence of ability to service the mortgage. It doesn’t have recourse against your income in event of a default. (California is a no-recourse stage; talk to a real estate lawyer or similar professional if you are curious on the precise application to your situation, HN.)

bm1362 8y ago
I’m literally buying a home now, with vested-not-liquid Uber RSUs and the lender would not honor them as assets.

karlakush 8y ago

Legal? Maybe, I'm not sure. It will certainly be prohibited by company policy, though. The reason why is because if you default on the loan, the bank could force you to sell your shares prior to the lock-out period ending in order to recoup their losses.