Jonah Patel
The sale and purchase of securities are governed by a range of regulations and laws. In the US, for example, every offer and sale of a security must be registered with the Securities and Exchange Commission (SEC) or be subject to an exemption from registration under the Securities Act of 1933. This requirement applies to the sale of securities to multiple high-net-worth individuals, private transactions, sales to family members, and offers and sales of securities of public and private companies. A security interest in goods is a purchase-money security interest (PMSI) to the extent that the goods are purchase-money collateral with respect to that security interest. PMSI gives a retailer or supplier priority for collecting on debt when a borrower or buyer defaults. In business-to-business (B2B) transactions, PMSI encourages companies to increase sales by directly financing new equipment or inventory purchases.
| Characteristics | Values |
|---|---|
| Registration | Either registered with the Securities and Exchange Commission (SEC) or subject to an exemption from registration under the Securities Act of 1933 |
| Registration statement | Form S-1, including a prospectus and additional information |
| Prospectus | The legal offering document, containing important facts about the business, financial condition, results of operations, risk factors, and management |
| Registration exemptions | Section 4(a)(2) of the Securities Act exempts "transactions by an issuer not involving any public offering"; purchasers must be "sophisticated investors" or able to bear the economic risk, have access to information, and agree to long-term investment |
| Regulation A offering | Securities can be offered publicly and sold to purchasers irrespective of their status as "accredited investors", with limitations on the amount that non-accredited investors can invest under Tier 2 offerings |
| Purchase-money security interest (PMSI) | A legal claim that allows a lender to repossess property or demand repayment if the borrower defaults; it gives the lender priority over other creditors |
| PMSI creation | When a creditor loans money to a debtor to finance the purchase of certain goods, and the debtor grants the creditor a security interest in those goods |
| PMSI collateral | Inventory, non-inventory, farm products, equipment, accounts receivable, and software |
| PMSI and UCC | Article 9 of the Uniform Commercial Code outlines the treatment of secured transactions, including PMSI creation and enforcement; PMSI is perfected by filing a UCC-1 prior to the debtor taking possession of assets or within 20 days after receipt |
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What You'll Learn
Registration with the Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) is a government agency that was founded to help the country respond to the Great Depression. The SEC works to protect investors from misconduct, promote fairness and efficiency in the securities markets, and facilitate capital formation for those looking to hire, innovate, and grow.
The SEC engages in rule-making through a transparent process guided by the Administrative Procedure Act and informed by public comment. Members of the public are invited to share comments on proposed rule-making. The SEC's Small Business Capital Formation Advisory Committee, for instance, holds public meetings regarding matters relating to rules and regulations affecting small and emerging businesses and their investors under the federal securities laws.
The SEC oversees securities exchanges, securities brokers and dealers, investment advisors, and mutual funds in an effort to promote fair dealing, the disclosure of important market information, and to prevent fraud.
In the context of securities registration, the SEC has outlined specific requirements and guidelines. For instance, in a PIPE transaction, a company is permitted to register the resale of securities prior to their issuance if certain conditions are met, including the completion of a Section 4(2)-exempt sale and the investor being at market risk at the time of filing. The investor must be irrevocably bound to purchase a set number of securities for a set purchase price that is not based on market price.
Additionally, the SEC provides guidance on securities act sections, such as Rule 153, which relates to prospectus delivery obligations for brokers or dealers effecting transactions on a national securities exchange or through a registered alternative trading system.
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The 'private placement' exemption
The private placement exemption, also known as the 4(a)(2) exemption, is a provision under the Securities Act of 1933 that allows companies to sell securities without registering with the Securities and Exchange Commission (SEC). This exemption is often used by startups and young companies to raise funds for growth and development while delaying or avoiding the scrutiny of an initial public offering (IPO).
To qualify for the private placement exemption, purchasers of securities must meet certain criteria. They must either have sufficient knowledge and experience in finance and business matters to be considered "sophisticated investors", or they must be able to bear the economic risk of the investment. These investors should also have access to the type of information that would normally be provided in a prospectus during a registered offering.
Additionally, private placements typically involve a private placement memorandum (PPM) instead of a prospectus. The PPM is not broadly marketed to the general public, and investors agree not to resell or distribute the securities publicly. The number of purchasers and their relationship to the company are also factors that can impact the qualification for this exemption. As the number of purchasers increases and they become more distant from the company, it becomes more challenging to demonstrate that the offering falls within the private placement exemption.
There are different rules within the private placement exemption, such as Rule 506(b), which prohibits general solicitation and limits sales to no more than 35 non-accredited investors in any 90-day period. Rule 506(c), on the other hand, permits general solicitation but requires all purchasers to be accredited investors. Regulation D, which includes Rule 506(b), is considered a "safe harbor" under Section 4(a)(2), providing objective standards for companies to meet the exemption requirements.
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Purchase Money Security Interest (PMSI)
PMSI is an exception to the first-in-time rule. It gives secured creditors who meet its requirements a special advantage to jump ahead in line of other creditors with respect to certain collateral. PMSI creditors can get super priority over third parties who perfected their interests first. UCC Section 9-103(b)(1) provides a fundamental definition: "A security interest in goods is a purchase-money security interest... to the extent that the goods are purchase-money collateral with respect to that security interest." In other words, a PMSI is created when a creditor loans money to a debtor to finance the purchase of certain goods. And in return, the debtor grants the creditor a security interest in those goods.
There are different types of collateral in which the creditor may be able to obtain a PMSI, including inventory, non-inventory, farm products, and so on. The method of assuring that the PMSI takes priority over other security interests in the goods differs in accordance with whether the goods are inventory or non-inventory. For non-inventory goods, the lending party must file a UCC-1 before the borrower takes possession of the goods or within the first 20 days after. For inventory goods, the lending party must notify other parties with potential secured interest claims as well as file a UCC-1 legal notice.
A PMSI is valid in most jurisdictions once the buyer agrees to it in writing and the lender files a financing statement. The procedure is outlined in Article 9 of the Uniform Commercial Code (UCC)—the standardized business regulations adopted by most states. These regulations were adopted to make it easier for corporations to conduct business with others across state lines. To constitute a PMSI, the UCC stipulates that a "close nexus" must exist between the acquisition of collateral and the secured obligation. In other words, the borrower cannot acquire collateral and subsequently create a security interest.
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UCC Article 9 Security Agreements
UCC Article 9 outlines the treatment of secured transactions, including how security interests are created and enforced. It is a standardised set of business regulations adopted by most states to make it easier for corporations to conduct business across state lines.
A security agreement gives the creditor a "security interest" in the "collateral" or "security property". This means that if the debtor defaults, the creditor can go against the collateral and repossess it or resell it to get payment on the loan. This is known as a purchase-money security interest (PMSI), which is an exception to the first-in-time rule. It gives creditors who meet its requirements a special advantage to jump ahead in line over other creditors with respect to certain collateral.
PMSI is created when a creditor loans money to a debtor to finance the purchase of certain goods, and in return, the debtor grants the creditor a security interest in those goods. There are different types of collateral for PMSI, including inventory, non-inventory, and farm products. To constitute a PMSI, there must be a close nexus between the acquisition of collateral and the secured obligation. This means the borrower cannot acquire collateral and then create a security interest.
It is important to note that the rules and requirements for UCC Article 9 Security Agreements may vary depending on the state and the specific circumstances of each case.
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Regulation A offering
Regulation A is an exemption from registration requirements with the Securities and Exchange Commission (SEC) that applies to public offerings of securities. It was instituted by the Securities Act of 1933 and updated in 2015 to allow companies to generate income under two separate tiers representing two different types of investments.
Tier 1 allows offerings of up to $20 million in a 12-month period. Companies under this tier don't have ongoing reporting requirements but must issue a report on the offering's final status. They must also file offering statements with the SEC, which need to be qualified by state regulators.
Tier 2 allows offerings of up to $75 million in a 12-month period. Companies under this tier are required to produce audited financial statements and file continual reports, including its final status. Issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators but still must file their offerings with the SEC. Tier 2 offerings have additional requirements, including limitations on the amount of money a non-accredited investor may invest.
Companies utilizing the Regulation A exemption are given distinct advantages over companies that must fully register. These advantages may include streamlined financial statements without audit obligations, three possible format choices for the offering circular, and no requirement to provide Exchange Act reports until the company has more than 500 shareholders and $10 million in assets.
To qualify for the Regulation A exemption, companies must meet certain basic requirements, including company eligibility, bad actor disqualification provisions, disclosure, and other matters. It's important for investors to understand which tier a security is offered under, as each tier has its own requirements and investment types.
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Frequently asked questions
A Purchase Money Security Interest (PMSI) is a legal claim that allows a lender to either repossess property financed with its loan or to demand repayment in cash if the borrower defaults. It gives the lender priority over claims made by other creditors. A PMSI is created when a creditor loans money to a debtor to finance the purchase of certain goods, and in return, the debtor grants the creditor a security interest in those goods.
The procedure for a PMSI is outlined in Article 9 of the Uniform Commercial Code (UCC) and requires the buyer's written agreement and the lender's filing of a financing statement. The UCC also stipulates that a “close nexus” must exist between the acquisition of collateral and the secured obligation.
Every offer and sale of a security must be registered with the Securities and Exchange Commission (SEC) or be subject to an exemption from registration under the Securities Act of 1933. This requirement applies to all sales of securities, including to high net worth individuals, family members, and public and private companies. The type of registration statement typically used for an initial public offering is a Form S-1 Registration Statement, which includes a prospectus and additional information for the SEC.
