Meaning
A statutory rule requires certain agreements to be in writing and signed by the party against whom enforcement is sought. In startup transactions, the statute of frauds securities refers to the legal requirement that contracts for the sale or transfer of securities must be written to be enforceable. This rule applies to agreements regarding founder shares, option grants, and equity purchases.
Its purpose is to prevent fraudulent claims of equity ownership based on perjury or faulty memory, ensuring that capitalization records remain reliable.
Written Evidence
Written notes or email threads can sometimes satisfy the statutory requirement if they contain the essential terms of the transaction. The writing must identify the parties and the amount of securities. Informal text messages or verbal agreements are generally insufficient to bypass the statute of frauds.
This requirement protects companies from opportunistic claims by former associates who allege they were promised stock during informal conversations.
Equitable Exception
Partial performance can sometimes overcome the requirement of a written contract in specific situations. If a buyer has already paid for the securities and the seller has accepted the payment, the absence of a written contract may not be fatal to the transaction. However, proving partial performance requires clear evidence that the payment was made specifically for the stock and not for some other purpose.
This exception is narrowly construed by legal authorities to maintain the integrity of the statute.
Corporate Safety
Enforcing the written requirement reduces the likelihood of long disputes over equity ownership.
