Many recipients of restricted securities make the error of valuing them for negotiation and tax purposes at the market prices of the issuer's freely tradable securities when in fact the lack of marketability inherent in restricted securities relative to their registered counterparts may call for significant valuation discounts. U.S. Treasury Revenue Ruling 77-287 provides guidance regarding the valuation of unregistered shares issued by a company with outstanding publicly traded common stock. Revenue Ruling 77-287 is strongly influenced by the results of the SEC Institutional Investor Study of 1971 in which the pricing of restricted stocks sold in private placements was compared to the market prices of the registered shares of the same issuers. Marketability discounts tend to decline with the size of the company's earnings base. The size of the issuer's revenue base.
Discounts tend to decline with the size of the company's revenue base.
The depth of the trading market. Discounts tend to decline as the average daily trading volume in the issuer's registered stock increases. Additional restrictions on sales. Similarly, agreements allowing the restricted shareholders to appoint directors, participate in management, or receive continuous disclosures of financial and operational information also tend to mitigate discounts. There are at least two methods for inferring an appropriate discount to the public stock price.