Legal Definitions - stop order

The term "stop order" has two primary meanings in a legal context:

• 1. In Securities Regulation (SEC Stop Order)

  A "stop order" in securities law refers to an official directive issued by the Securities and Exchange Commission (SEC). The SEC is a U.S. government agency responsible for protecting investors and maintaining fair and orderly functioning of securities markets. This order temporarily halts or suspends the effectiveness of a company's registration statement. A registration statement is a comprehensive document that companies must file with the SEC before they can offer or sell securities (like stocks or bonds) to the public. The SEC issues a stop order when it finds that the registration statement contains information that is false, incomplete, or misleading, which could potentially harm investors. The purpose is to protect the public by preventing the sale of securities based on inaccurate disclosures until the issues are corrected.

  • Example 1: A new energy startup, "GreenFuture Corp.," files a registration statement with the SEC to launch an Initial Public Offering (IPO) and raise capital. During its review, the SEC discovers that GreenFuture's financial projections are based on unverified data and that the company has significantly overstated its patented technology's readiness for market.

    Illustration: The SEC would issue a stop order against GreenFuture Corp.'s registration statement. This action prevents the company from selling its shares to the public until it revises the misleading financial projections and provides accurate information about its technology, ensuring potential investors receive truthful disclosures.

  • Example 2: "MediCare Innovations," a pharmaceutical company, attempts to register additional shares to fund a new drug trial. The SEC's review reveals that the company failed to disclose crucial negative results from preliminary drug trials, which could significantly impact the drug's future viability and investor confidence.

    Illustration: The SEC would impose a stop order on MediCare Innovations' registration. This prevents the company from issuing new shares until it fully discloses all relevant trial data, allowing investors to make informed decisions based on complete and accurate information.

• 2. In Banking (Stop-Payment Order)

  A "stop order," often referred to as a stop-payment order, is an instruction given by a bank customer to their bank, directing the bank not to honor or pay a specific check or other authorized payment that the customer previously issued. This prevents the funds from being debited from the customer's account if the check is presented for payment.

  • Example 1: Sarah hired a contractor to repair her roof and paid them with a check. Before the check was cashed, she discovered the contractor used substandard materials and performed shoddy work, violating their agreement.

    Illustration: Sarah can contact her bank and issue a stop-payment order on the check she wrote to the contractor. This instruction tells the bank not to process the payment if the contractor attempts to deposit or cash the check, allowing Sarah to resolve the dispute without losing her money immediately.

  • Example 2: Mark accidentally left his checkbook at a restaurant. Realizing it might have been stolen, he immediately contacted his bank.

    Illustration: Mark would place a stop-payment order on all the unwritten checks in his lost checkbook. This proactive measure ensures that if anyone tries to forge his signature and cash one of those checks, the bank will refuse to honor it, protecting his account from unauthorized withdrawals.

  • Example 3: A small business owner, Mr. Chen, wrote a check to a supplier for a large order of goods. Shortly after, he learned that the supplier had gone out of business unexpectedly and would not be able to fulfill the order.

    Illustration: Mr. Chen would issue a stop-payment order to his bank for the check written to the defunct supplier. This prevents the bank from paying the check if it is presented, safeguarding his funds since the goods will not be delivered.