Isabella Carter
The sale of securities is a highly regulated process, with requirements varying depending on the type of security and the nature of the sale. In the US, 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. The type of registration statement used for an initial public offering is typically a Form S-1 Registration Statement, which includes a prospectus with important facts about the issuer's business operations, financial condition, and results of operations. This must be delivered to everyone who buys the securities or is made an offer.
One type of security is a purchase-money security interest (PMSI), which is a legal claim that allows a lender to either repossess property financed with its loan or demand repayment in cash if the borrower defaults. This gives the lender priority over 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.
| 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 | Legal offering document with important facts about the business, financial condition, results of operations, risk factors, and management |
| Registration exemption | Section 4(a)(2) of the Securities Act exempts "transactions by an issuer not involving any public offering" |
| Registration exemption requirements | Purchasers must be sophisticated investors, able to bear economic risk, have access to prospectus 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 |
| Regulation A offering securities | Not considered "restricted securities" |
| UCC Article 9 | Outlines the treatment of secured transactions, including how security interests are created and enforced |
| Security agreement | Must contain simple words showing that a security interest is intended |
| Collateral description | Sufficient to identify it, e.g. serial numbers for equipment, a inventory list, or certificates of title |
| Security interest upon account opening | A supplier can require a security interest upon the opening of an account or as a condition to continue the account or increase the credit limit |
| Lower costs | A security interest in equipment or accounts receivable can benefit the buyer with lower costs as long as the terms of the credit agreement are met |
| Priority of purchase-money security interests | A perfected purchase-money security interest in inventory has priority over a conflicting security interest in the same inventory and in proceeds of chattel paper |
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What You'll Learn
Registration with the Securities and Exchange Commission (SEC)
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, per federal securities laws. This requirement applies to the sale of securities to multiple high net worth individuals, the sale of a security to one person in a private transaction, the sale of a security to a family member, and all offers and sales of securities of public and private companies, including organisations with only two or three persons.
The SEC oversees securities exchanges, securities brokers and dealers, investment advisors, and mutual funds to promote fair dealing, the disclosure of important market information, and to prevent fraud. The SEC also engages in rulemaking through a transparent process guided by the Administrative Procedure Act and informed by public comment.
The type of registration statement used for an initial public offering is typically a Form S-1 Registration Statement (Form S-1). Form S-1 includes two parts: Part I and Part II. Part I is the prospectus, the legal offering or “selling” document. In the prospectus, the “issuer” of the securities must describe important facts about its business operations, financial condition, results of operations, risk factors, and management. It must also include audited financial statements. The prospectus must be delivered to everyone who buys the securities, as well as anyone who is made an offer to purchase the securities. Part II contains additional information that an issuer does not have to deliver to investors but must file with the SEC, such as copies of material contracts, signatures of management, and other representations.
Section 4(a)(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.” To qualify for this exemption, sometimes referred to as the “private placement” exemption, purchasers of securities must meet certain requirements.
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Registration exemptions
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, the sale of a security to one person in a private transaction, the sale of a security to a family member, and all offers and sales of securities of public and private companies, including organisations with only two or three persons.
One such exemption is Section 4(a)(2) of the Securities Act, which exempts "transactions by an issuer not involving any public offering". To qualify for this exemption, purchasers of securities must be considered "sophisticated investors" with sufficient knowledge and experience in finance and business matters to evaluate the risks and merits of the investment, or be able to bear the investment's economic risk. They must also have access to the type of information that would normally be provided in a prospectus in a registered offering, and agree to take the securities for long-term investment without a view to distribute them to the public. This exemption is sometimes referred to as the "private placement" exemption.
Another exemption is Regulation A, which allows securities to be offered publicly using general solicitation and advertising, and they can be sold to purchasers irrespective of their status as "accredited investors", with certain limitations on the amount that non-accredited investors can invest under Tier 2 offerings. Securities sold under Regulation A are not considered "restricted securities".
Additionally, Rule 506(b) of Regulation D allows for a private placement offering document to be made to up to 35 non-accredited investors, provided that it sets forth substantially all of the information that would be required in a registration statement.
It is important to note that even if a company's offering qualifies for an exemption from registration, it must still comply with state securities laws and regulations in the states where the securities are offered and sold. State securities regulators have the authority to investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees.
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Regulation A offerings
Regulation A is an exemption from registration requirements with the Securities and Exchange Commission (SEC) that applies to public offerings of securities. Regulation A was updated in 2015 to allow companies to generate income under two separate tiers, representing two different types of investments. The two tiers are:
- Tier 1: For offerings of up to $20 million in a 12-month period. Companies don't have ongoing reporting requirements but must issue a report on the offering's final status.
- Tier 2: For offerings of up to $75 million in a 12-month period. Companies are required to produce audited financial statements and file continual reports, including their final status.
Securities in a Regulation A offering can be offered publicly, using general solicitation and advertising, and can be sold to purchasers irrespective of their status as "accredited investors," subject to certain limitations on the amount that non-"accredited investors" can invest under Tier 2 offerings.
Companies utilizing the Regulation A exemption are given distinct advantages over companies that must fully register. The advantages of Regulation A offerings include streamlined financial statements without audit obligations, three possible format choices to use to arrange the offering circular, and no requirement to provide Exchange Act reports until the company has more than 500 shareholders and $10 million in assets.
It is important for investors interested in purchasing securities sold by companies utilizing Regulation A to understand which tier the security was offered. Every company must indicate the tier under which the security falls on the front of its disclosure document or offering circular.
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UCC Article 9 Security Agreements
A UCC Article 9 Security Agreement is a contract that gives a creditor a security interest in a debtor's collateral. This typically occurs when a debtor defaults on a loan, and the creditor seeks to recover the debt by taking possession of the collateral.
A security interest can be taken in a variety of assets, including vehicles, inventory, accounts receivable, and even real estate. However, real estate security interests are not covered by the UCC and are instead governed by state law. To perfect a security interest in a vehicle, a lien must be placed on the title and filed with the DMV. For other types of collateral, such as inventory or accounts receivable, a UCC-1 financing statement must be filed to perfect the security interest.
The process of obtaining a security interest typically involves three steps: Attachment, Perfection, and Priority. Attachment refers to the execution of the security agreement, where the debtor acquires rights to the collateral. Perfection refers to the legal process of protecting the security interest from claims of other parties. This can be done by filing a UCC-1 financing statement or, in the case of vehicles, by placing a lien on the title. Priority refers to the order of collateral disposition, where a perfected claim falls in relation to other creditors.
A Purchase Money Security Interest (PMSI) is a type of security interest that gives a creditor priority over other creditors, even if they were not the first to perfect their interest. A PMSI is created 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. To constitute a PMSI, there must be a "close nexus" between the acquisition of collateral and the secured obligation. PMSI rules vary based on the type of collateral, with specific rules for inventory and non-inventory collateral outlined in Section 9-324(b) of the UCC.
In conclusion, UCC Article 9 Security Agreements provide a legal framework for creditors to protect their financial interests in the event of a debtor's default. By obtaining a security interest in the debtor's collateral, creditors can recover their debt by taking possession of or seizing the collateral. The process involves attachment, perfection, and priority, with specific rules outlined in the UCC for different types of collateral.
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Consignments
The Uniform Commercial Code (UCC) Article 9 outlines the rules for secured transactions, including those involving consignments. Section 9-103(b) of the UCC specifically addresses consignments and the priority of the consignor's interest in the goods. The consignor's interest in the goods is generally given priority over the claims of lien creditors, competing secured parties, and purchasers of the goods from the consignee. This is known as the consignor's "dual-status" rule, where their interest can be both a purchase-money security interest and a non-purchase-money security interest.
The rights and duties of the consignor and consignee towards each other are governed by a bailment arrangement. This means that the consignor remains the owner of the goods, while the consignee has possession of them for a specific purpose, in this case, the sale of the goods. The consignor's interest in the goods is superior to that of the consignee and any creditors or purchasers until the goods are sold.
It is important to note that the UCC provisions on consignments apply primarily to transactions involving non-consumer goods. The rules and priorities may differ for transactions involving consumer goods, where the consignor's rights may be more limited.
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