Offer and Sale
Understanding what constitutes an "offer" and a "sale" under the Uniform Securities Act is essential because registration and anti-fraud requirements are triggered by these activities. The definitions are broad to ensure investor protection.
Definition of "Offer"
An offer includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security for value. This includes:
- Advertisements for securities
- Solicitations to purchase
- Any communication designed to generate interest in a security
- Preliminary negotiations or agreements
Key Point: An offer occurs whenever someone tries to interest another party in purchasing a security—even before any actual sale takes place.
Definition of "Sale"
A sale is any contract to sell or dispose of a security or interest in a security for value. The concept of "value" is central to the definition.
What Constitutes "Value"?
| Value Exists | No Value |
|---|---|
| Cash payment | Bona fide gift of non-assessable stock |
| Property exchange | Stock dividend (no additional payment) |
| Services rendered | Stock split |
| Assumption of liabilities | Inheritance |
| Promise to pay in the future | Pledge/collateral (temporary transfer) |
What IS an Offer or Sale
| Activity | Offer? | Sale? |
|---|---|---|
| Advertisement for securities | Yes | No |
| Solicitation letter | Yes | No |
| Contract to purchase securities | Yes | Yes |
| Exchange of one security for another | Yes | Yes |
| Security given as bonus with purchase | Yes | Yes |
| Gift of assessable stock | Yes | Yes |
| Warrant or right to purchase | Yes | Yes (of underlying security) |
| Convertible security | Yes | Yes (of both securities) |
Assessable vs. Non-Assessable Stock
| Type | Definition | Gift = Sale? |
|---|---|---|
| Assessable Stock | Issuer can demand additional capital from shareholders | Yes |
| Non-Assessable Stock | No further obligation (most common stock today) | No |
Exam Tip: A gift of assessable stock is a sale because the recipient takes on a potential financial obligation. A gift of non-assessable stock is NOT a sale because there's no value exchanged.
What Is NOT an Offer or Sale
The USA specifically excludes certain activities from the offer/sale definitions:
Excluded Activities
| Activity | Why Excluded |
|---|---|
| Bona fide gift | No value exchanged (non-assessable stock) |
| Stock dividend | Shareholders receive proportional shares, no value given |
| Stock split | Increases shares but not ownership percentage |
| Bona fide pledge/loan | Temporary transfer as collateral |
| Judicial reorganization | Court-supervised exchange of securities |
| Inheritance | Transfer by operation of law |
Stock Dividends: The Details
| Scenario | Offer/Sale? |
|---|---|
| Regular stock dividend (no payment required) | No |
| Optional stock dividend (can choose cash or stock) | No |
| Stock dividend requiring additional payment | Yes |
| Dividend of different issuer's stock | No (if no value given) |
Important: A stock dividend is NOT a sale because shareholders receive additional shares proportional to their holdings—they give nothing of value. However, if shareholders must pay anything additional to receive the dividend, it becomes a sale.
Warrants, Rights, and Convertible Securities
These instruments create special situations for the offer/sale analysis:
Warrants and Rights
An offer of warrants or rights to purchase securities is also considered an offer of the underlying security.
| Instrument | What's Being Offered |
|---|---|
| Warrant | Both the warrant AND the underlying security |
| Right | Both the right AND the underlying security |
| Call option | Both the option AND the underlying security |
Convertible Securities
An offer of convertible securities (like convertible bonds or convertible preferred stock) is an offer of BOTH:
- The convertible security itself
- The underlying security into which it converts
Exam Tip: When a company offers convertible bonds, it's simultaneously offering both the bonds AND the common stock they convert into.
Practical Applications
Scenario Analysis
| Scenario | Offer? | Sale? |
|---|---|---|
| Company emails shareholders about a new stock offering | Yes | No |
| Investor receives 100 shares as inheritance | No | No |
| Employee receives stock as year-end bonus | Yes | Yes (compensation = value) |
| Shareholder receives 2-for-1 stock split | No | No |
| Company issues stock dividend | No | No |
| Investor gifts 100 shares of Apple stock to daughter | No | No (non-assessable) |
| Bank takes stock as collateral for a loan | No | No (pledge) |
Key Takeaways
- An "offer" is any attempt to solicit interest in a security
- A "sale" requires transfer of a security for value
- Gifts of non-assessable stock are NOT sales; gifts of assessable stock ARE sales
- Stock dividends and stock splits are NOT offers or sales
- Bona fide pledges and inheritances are NOT sales
- Warrants, rights, and convertible securities include offers of underlying securities
Under the USA, which of the following is considered a "sale" of securities?
An investor receives 100 additional shares of stock as a dividend from a company. Under the USA, this is:
When a company offers convertible bonds to investors, under the USA this is considered:
Which of the following would NOT be excluded from the definition of "sale" under the USA?
1.5 Exclusions from Definitions
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