Direct Stock Purchase Plans

• What is a "DRIP"?
• What is a direct stock purchase plan?
• What is a company-sponsored DRIP or direct stock purchase plan?
• What is a bank-sponsored DRIP or direct stock purchase plan?
• Why are direct stock purchase plans and DRIPs so popular with investors?
• What are the disadvantages of direct stock purchase plans and DRIPs for investors?
• How can direct stock purchase plans and DRIPs benefit a company?

• Does a company need to register the stock issued in its DRIP or direct stock purchase plan?
• If a company does not want to register the stock offered in its DRIP or direct stock purchase plan, what can it disclose about the plan on its Web site?
• Can a third party host a Web directory?
• Can a third party set up a Web site to offer DRIPs and direct stock purchase plans without having to register as a broker?
• Can a third party maintain a Web directory of companies whose stock is offered through DRIPs and direct stock purchase plans without registering the stock?
• How does the Gramm-Leach-Bliley Act affect how banks administer direct stock purchase plans?

• How have Web directories fueled direct stock purchase plan growth?
• How have Web directories fueled DRIP growth?
• What are the differences between online direct stock purchase plans and DRIPs?
• Can a company register its DRIP or direct stock purchase plan and market it on the Web?
• How are direct stock purchase plans growing?
• How much does it cost an investor to participate in a DRIP or direct stock purchase plan?
• How can investors determine which companies have DRIPs or direct stock purchase plans?

• Can investors reinvest dividends even if the company does not have a DRIP?
• What is a "synthetic DRIP"?
• How much do synthetic DRIPs cost?
• Why do investors buy synthetic DRIPs if they are expensive?
• Who offers synthetic DRIPs?

A. Understanding Direct Stock Purchase Plans and DRIPs

What is a "DRIP"?

A "dividend reinvestment plan." Investors can have their dividends automatically reinvested in a company's stock through these plans - as well as buy additional shares directly from a company without paying a commission.

DRIPs don't provide a way for an investor to buy that first share of stock that makes them eligible to participate in the DRIP. See more @ which companies have adopted DRIPs.

There are now ways to invest in what essentially are DRIPs without a company's involvement at all. See more @ synthetic DRIPs.

What is a direct stock purchase plan?

Very similar to a DRIP - except an investor can enroll and buy stock in a company without already being a stockholder. They also are known as "open market purchase plans" or "DRSPPs."

Larger companies with a liquid market for its stock tend to have direct stock purchase plans. See more @ which companies have adopted direct stock purchase plans.

Note that direct stock purchase plans differ from employee stock purchase plans - because only employees can participate in employee stock purchase plans, whereas any investor can participate in a direct stock purchase plan.

There are now ways to invest in what essentially are direct stock purchase plans without a company's involvement at all. See more @ synthetic DRIPs.

What is a company-sponsored DRIP or direct stock purchase plan?

A plan adopted and operated by the issuer. In these plans, stock is registered in an investor's name, not in "street name." See more @ street name ownership.

When an investor sells the stock, the company normally buys it back through the plan - although some plans require investors to sell their stock in the open market.

What is a bank-sponsored DRIP or direct stock purchase plan?

A plan adopted by the issuer - but operated by a bank. An investor pays an administrative fee to buy stock through its bank - the bank then buys the stock in the open market in the investor's name.

Why are direct stock purchase plans and DRIPs so popular with investors?

Because investors can routinely purchase a small amount of stock on a monthly basis - this is part of the popular "dollar cost averaging" investing strategy. It also allows investors to buy fractional shares of stock that otherwise would be too expensive for them to purchase.

Typical plan features include:

What are the disadvantages of direct stock purchase plans and DRIPs for investors?

Investors can't dictate the stock prices at which they buy stock in these plans - since trades are made on a regular, periodic basis.

Many companies charge fees for their plans - so they may not be cost-effective, particularly since broker commission rates have dropped dramatically over the past few years.

How can direct stock purchase plans and DRIPs benefit a company?

Companies benefit from the ability to cross-market their products and services - and raise capital inexpensively.

They also benefit because the type of investors that invest in these plans tend to stay for the long term - and companies know the identity of these investors since they normally are record holders (which in turn facilitates the ability to electronically communicate). See more @ communicating with record holders.

Since individual investors buy through these plans - a company reduces its risk of losing control when it sells stock through its plan.

B. Unregistered Direct Stock Purchase Plans and DRIPs on the Web

Does a company need to register the stock issued in its DRIP or direct stock purchase plan?

No - so long as certain conditions are met. The SEC has an "issuer involvement" framework under which the SEC has outlined the roles for a company and an unaffiliated entity that sponsors the company's unregistered plan.

The SEC's "issuer involvement" framework has three factors:

If a company does not want to register the stock offered in its DRIP or direct stock purchase plan, what can it disclose about the plan on its Web site?

Only an announcement of the DRIP's availability - and the phone number of the independent agent from whom more information can be obtained. A company may not use its Web site to advertise the DRIP or its benefits.

The company's Web site can link to its independent agent's Web site, which has a DRIP brochure and enrollment card. However, it is important that the link may not go directly to the DRIP materials - it can only link directly to the agent's home page (from which investors can then use links to access the DRIP materials).

Source: The SEC provided this guidance in Example 2 of Release 33-7288 (May 9, 1996). The SEC staff basically reaffirmed this Example in the no-action letters issued to Securities Transfer Association, Inc. (available October 10, 1997) and Prodigy Services Corp. and Electronic Wall Street, Inc. (available May 9, 1998).

Can a third party host a Web directory?

Yes. In fact, most of the Web directories are hosted by third parties - they are not hosted by companies or the agents that typically sponsor plans. See more @ who hosts Web directories for plans.

Source: In a no-action letter Prodigy Services Corp. and Electronic Wall Street, Inc. (available May 9, 1998), the SEC staff allowed an Internet service provider to list unregistered plans sponsored by banks.

Can a third party set up a Web site to offer DRIPs and direct stock purchase plans without having to register as a broker?

So long as their activities are somewhat limited - and clearly fit within the guidance provided in the existing line of SEC staff no-action letters.

Third parties can post Web prospectuses and tombstone ads - as well as process orders from investors, including electronic payments. These orders and payments can be provided directly to a company's transfer agent.

However, if a third parties conducts too much "broker-like" activity for a plan, such as communicating about the nature of the transactions - it should register as a broker.

Note that banks are able to sponsor plans and not register as brokers - banks and transfer agents can't rely on this exemption.

Source: Banks are exempt from the definition of "broker" in Section 3(a)(4) of the Securities Exchange Act of 1934 and company employees only have a limited exclusion from broker registration through a series of no-action letters. The SEC staff gradually has allowed more third-party online activity, as reflected in the two StockPower Inc. no-action letters (available November 3, 1998 and July 24, 1998). The last StockPower no-action letter clarified that tombstone ads on a Web site are not considered "special selling efforts" under Rule 102 of Regulation M.

Can a third party maintain a Web directory of companies whose stock is offered through DRIPs and direct stock purchase plans without registering the stock?

Yes - so long as the directories do not put investors in contact with the companies listed in the directory or accept fees from these companies.

The Web directories can only deal with plan administrators (typically the company's bank or transfer agent) to obtain:

How does the Gramm-Leach-Bliley Act affect how banks administer direct stock purchase plans?

The statute establishes a new framework for determining what type of nonbanking activities are permissible for bank holding companies, including administration of these plans.

Banks that administer direct stock purchase plans still are able to administer these plans if: