Offers and Sales
Now that you can identify what IS and what is NOT a security, the next question is: when does a transaction in a security occur? The Uniform Securities Act (USA) carefully defines "offer" and "sale" because these definitions determine when registration and antifraud provisions apply.
Definition of "Sale"
- "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of a security or interest in a security for value
- The key element is "for value": there must be an exchange of something of value (money, property, services) for the security
- If no value changes hands, there is generally no "sale"
Definition of "Offer"
- "Offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value
- An offer occurs before a completed sale. It is any attempt to sell or any solicitation to buy
- Think of it this way: An attempt is an offer; if the attempt is successful, a sale has occurred
The distinction matters because the USA regulates both offers and sales. You do not need to complete a transaction to trigger the Act's requirements; merely attempting to sell or soliciting a purchase is enough.
What IS an Offer or Sale
Some situations that might not seem like sales are treated as offers or sales under the USA:
| Situation | Classification | Reason |
|---|---|---|
| A security given as a bonus with a purchase | Offer and sale | Treated as part of the purchase price; considered offered and sold for value |
| A gift of assessable stock | Offer and sale | Recipient may be required to pay future assessments, so value is involved |
| Sale of a warrant or right to purchase another security | Offer of the underlying security | The other security is considered continuously offered as long as the warrant/right is exercisable |
| Sale of a convertible security | Offer of the security it converts into | The underlying security is deemed to be offered |
Key insight: The USA looks at the economic substance of a transaction, not just its form. If value is changing hands, even indirectly, it may be an offer or sale.
Exam Tip: Gotchas
- A "free" security given as a bonus IS a sale. If you buy a product and receive a security as a bonus, that security is deemed sold for value. The purchase price covers both the product and the security.
- A gift of assessable stock IS a sale. The recipient may owe future assessments, so value is involved even though the stock was "given away."
What is NOT an Offer or Sale
These transactions are specifically excluded from the definitions of "offer" and "sale":
| Situation | Reason |
|---|---|
| Bona fide pledge or loan | Pledging securities as collateral is not a sale |
| Stock dividend (where shareholders may elect cash or stock) | No value is given by stockholders beyond surrendering a right to a cash/property dividend |
| Class vote on a merger, consolidation, or reclassification | Corporate reorganization votes incident to the certificate of incorporation or statute |
| Judicially approved reorganization | Securities issued in exchange for outstanding securities, claims, or property in a court-supervised reorganization |
Important Nuances
Bona fide pledge: Pledging securities as collateral for a loan is NOT a sale. However, if the lender later forecloses and sells the pledged securities, that subsequent sale IS a sale under the USA.
Stock dividends: A stock dividend is NOT a sale, but only if shareholders had the option to take cash or stock and chose stock. The logic is that no new value flows from the shareholder to the corporation.
Bonus securities: If you buy a product and receive a "free" security as a bonus, the security is deemed to have been sold for value. The purchase price of the product is treated as consideration for both the product and the security.
Exam Tip: Gotchas
- A bona fide pledge is NOT a sale, but foreclosure IS. If a lender forecloses and sells the pledged securities, that subsequent sale IS a sale under the USA. The exam tests this two-step scenario frequently.
- Stock dividends are NOT sales, but only with a cash election. The exclusion applies when shareholders could choose cash or stock and chose stock. Stock dividends and stock splits are different concepts and often confused on the exam.