Bona Fide Pledgee

Tavener Hoyle borrowed 400,000 dollars from Merrowvale Bank three years ago and pledged 60,000 unregistered shares of a private company as collateral in a genuine commercial loan. Hoyle defaults, and the bank sells the pledged shares to recover the debt. The bank had no purpose of evading the Uniform Securities Act when it took or sold the collateral. Under the Act, the bank sale is:

1. A.a non-exempt transaction requiring registration, because the shares themselves were never registeredA transaction exemption removes the registration requirement for that transaction regardless of the security registration status.
2. B.exempt only because the seller is a bank, which is itself an exempt personThe exemption turns on the pledgee status, not on the identity of the lender. A non-bank pledgee would be equally covered.
3. C.an exempt transaction, because it is executed by a bona fide pledgee with no purpose of evading the ActCorrect. The Act exempts transactions by a bona fide pledgee realising on genuine collateral.
4. D.an exempt transaction that also places the sale beyond the antifraud provisions of the ActNo exemption ever removes the antifraud provisions. They apply to every offer and sale.

Why: The Act exempts any transaction executed by a bona fide pledgee, provided the pledge was not made for the purpose of evading the Act. A lender realising on genuine collateral is not distributing securities to the public, so requiring registration would serve no investor protection purpose. The exemption is a transaction exemption, so the antifraud provisions continue to apply to how the sale is conducted.

A bank forecloses on stock pledged as collateral for a defaulted loan and sells the shares to recover the debt, with no purpose of evading the Act. The sale is:

1. A.Exempt only if the stock is exchange-listedWrong. The exemption turns on the pledgee's good faith, not the security's listing.
2. B.An exempt transaction as a bona fide pledgee's saleCorrect. Sec. 402(b)(7) exempts good-faith foreclosure sales of pledged securities.
3. C.Prohibited unless the borrower consents to the saleWrong. Default triggers the pledgee's contractual right; no consent is needed.
4. D.An issuer transaction requiring registrationWrong. The bank is not the issuer and the shares are outstanding.

Why: Sales by a bona fide pledgee realizing on defaulted collateral, absent evasive purpose, are exempt transactions under the Act. Citation: Uniform Securities Act Sec. 402(b)(7). Takeaway: good-faith collateral liquidations are exempt transactions.