Visa’s Stake in Square Is a Whole Lot Lower Than a Widely-Reported 10%

It was all over the financial press Friday morning that Visa Inc. owned nearly 10% of merchant processor Square Inc. But it turns out that Visa’s real stake is a tad lower—try less than 2%.

The news stories, which started with a Reuters report out of India, were based on a misreading of a filing Visa made Thursday with the Securities and Exchange Commission, Visa says. The reports said Visa owns 9.99% of Square, and 9.99% is in fact the number Visa disclosed in the filing pertaining to its holdings of a class of Square’s stock that it owns.

But there’s more to the story.

According to the filing, Visa International, a wholly owned subsidiary of Visa Inc., owns 4.19 million shares of Square’s Class B common stock. That stake works out to 1.4% of the 300.9 million Class B shares in issue as of Square’s November initial public offering. In addition, Square had 27 million Class A shares at the time of the IPO, for a total of 327.9 million class A and B shares. That would make Visa’s stake even less, about 1.3%.

Visa first took an undisclosed stake in Square in April of 2011, when the processor was a widely watched startup headed by Twitter co-founder Jack Dorsey, an Internet superstar.

“Various news outlets have incorrectly reported that Visa is currently a top 5 shareholder of Square Inc., currently owning 9.99% of Square’s Class A common stock,” an emailed Visa statement says. “Visa has not bought or sold Square shares since its original investment. Visa’s current holdings, which consist of 4,194,230 shares of Class B common stock, represent approximately 1% of Square’s fully diluted common equity as of Dec. 31, 2015.”

The two share classes are alike in most respects, but each Class B share is entitled to 10 votes versus only one for a Class A share. The Class B shareholders, including chief executive Dorsey, control 99% of Square’s voting power. The IPO involved only the Class A shares, which trade on the New York Stock Exchange.

According to a registration statement Square filed ahead of the IPO, a Class B share can be converted at any time into a Class A share. But under an agreement between the two companies disclosed in Thursday’s filing, only 3.52 million of Visa’s Class B shares can be converted at any given time. If those Class B shares were converted, Visa would have about 13% of the Class A shares.

Exactly how the 9.99% figure was calculated is unclear. A Visa spokesperson did not have the answer to that question when asked by Digital Transactions News, but says the report in which the statistic is contained, a so-called Schedule 13G, is required by the SEC and that Visa completed it according to criteria set by the commission.

Payments-industry analyst Gil Luria, a managing director at Los Angeles-based Wedbush Securities, isn’t surprised by the confusion. “The report was very unclear … it’s easy to understand how it got misconstrued,” Luria says.

The Visa spokesperson could not say if the company plans to convert some or all of its Class B shares into Class A shares, which then could be sold on the open market. But Luria believes that’s probably the real reason for the report. Visa’s history, he says, shows that it will invest in privately held startups, but not publicly held companies, unless it wants to buy them outright.

“It’s safe to assume that they’re preparing to sell,” he says.

In any case, the hullabaloo apparently boosted Square’s stock, which has been beaten down since the IPO but on Friday afternoon was trading up about 7% over Thursday’s $8.62 close.