Quick Answer
A private offering can involve five classes of securities: equity (ownership), debt (a creditor claim), a convertible security (debt or preferred stock exchangeable for equity), a warrant (a right to buy equity at a set price), and a unit (a bundle of two or more of these sold together as one instrument).
These five classes are the building blocks a placement agent sees in almost every offering memorandum, and the exam tests whether you can tell a component from the package that holds it.
What Are the Five Classes of Securities in a Private Offering?
| Class | What It Represents |
|---|---|
| Equity | An ownership interest in the issuer, such as common or preferred stock |
| Debt | A creditor claim against the issuer, such as a note or bond, carrying a stated repayment obligation |
| Convertible security | A debt instrument or preferred stock that the holder may exchange for the issuer's equity under stated terms |
| Warrant | A right to purchase the issuer's equity at a set price within a set period, often attached to a debt or equity offering |
| Unit | A single security formed by bundling two or more of the above classes, such as a share plus a warrant, and sold together as one instrument |
Exam Tip: Gotchas
- A unit is not its own class of ownership or debt. It is a packaging of other classes, commonly equity plus a warrant, sold together. The components can typically be separated and traded independently after a stated date.
What Should You Check on Exam Day?
- Distinguish equity (ownership) from debt (a creditor claim) when a scenario describes what an investor actually holds.
- Confirm whether a convertible security or a warrant is described. A convertible is exchanged for equity, surrendering the original instrument; a warrant is exercised, buying equity for cash at the set price, and is never surrendered.
- Remember a unit is a bundle of other classes, not a sixth class on its own.