Series 63

The Foundation - The Uniform Securities Act (USA) - Definitions Part 6

  • SALE - "Sale" includes every contract of sale, contract to sell, or disposition of, a security or interest in a security for value, and "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to purchase, a security or interest in a security for value. Both terms include:
    1. A security given or delivered with, or as a bonus on account of, a purchase of securities or any other thing constituting part of the subject of the purchase and having been offered and sold for value;
       
    2. A gift of assessable stock involving an offer and sale; and
       
    3. A sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer and a sale or offer of a security that gives the holder a present or future right or privilege to convert the security into another security of the same or another issuer, including an offer of the other security.
Let's take this from the top: the law must define every term used. If you read that "an agent who offers securities for sale must be registered," you must be able to legally define "agent", "sell/sale/offer to sell" and "securities".
    1. If an investor, for example, buys a bond and with the bond, receives warrants ("constituting part of the purchase") from the company, the warrant is a part of the sale.
       
    2. That term, "gift of assessable stock", is more than a little out of tune with the times. Assessable stock has not been traded (or issued) in this country for more than 50 years! Assessable stock was issued at a discount from par value and the owner could be assessed by the company or its creditors for the difference between the purchase price and par. For example, if an investor in the early 1900s bought some assessable railroad stock with a par value of $50 per share but paid $5 per share, if the company needed money, it could assess the stockholders for up to $45 per share! Today, all stock certificates state that they are "full-paid and non-assessable." The drafters of the USA may be quite familiar with securities laws, but they are evidently not so up to date on the securities themselves. Just know that a "gift of assessable stock" is considered a sale.
       
    3. If an agent sells a client a warrant, a right, or an option on securities, as a transaction apart from the stock itself, this is the same as selling the securities themselves.
Now let's take a look at transactions/items that are not considered to be a sale. First, we'll list some of these and then explore them one by one.
    • A pledge of securities as collateral for a loan
    • A stock dividend
    • Securities received as a result of reorganization or merger
This is not a complete list, but it represents some of the major points of the law for the purposes of the exam.
    • A pledge of securities as collateral for a loan is the normal practice in an investor's margin account. The investor is borrowing money to buy stock, and using the stock as collateral. The act of pledging the stock as collateral is known as "hypothecation." This term, in the exam, may be associated with the term "lien," since the securities pledged are collateral for the loan.
       
    • A stock dividend is not a sale because, at the time of the payment of such a dividend, there is no transfer of value. Getting a stock dividend is much like getting four $5 bills for a $20 dollar bill.
       
    • When those people who own securities of company "A" receive stock from company "B" because of a merger or reorganization, the receipt of those securities by the stockholder doesn't represent a sale.



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