General Obligation Bond

Preston Ivey is a salaried employee of the City of Larkspur. As part of his duties he offers the city's general obligation bonds directly to Larkspur residents. He receives no commission and no compensation tied to the amount sold. Under the Uniform Securities Act, Preston:

1. A.Must register as a broker-dealer, because he effects transactions for the account of the cityAn individual representing an issuer is evaluated as an agent. Broker-dealer status is a separate category.
2. B.Must register as an agent unless he sells to fewer than ten Larkspur residentsThe ten-person ceiling belongs to the private placement exemption and has nothing to do with the agent exclusion.
3. C.Must register as an agent, because he is offering and selling securities to the publicOffering securities is the general trigger, but this exclusion is written precisely for issuer employees selling exempt securities.
4. D.Is not an agent and need not register, because he represents an issuer in transactions in exempt securitiesCorrect. Representing an issuer in transactions in exempt securities such as municipal bonds falls outside the agent definition.

Why: The Act excludes from the definition of agent an individual who represents an issuer in effecting transactions in certain exempt securities, and municipal general obligation bonds are exempt securities. Because Preston represents the issuing municipality, sells an exempt security, and receives no transaction-based compensation, he is not an agent and need not register. He also is not a broker-dealer, since an individual representing an issuer is analyzed under the agent definition.

The Calderwood Regional Sewer District issues bonds that are payable first from the net revenues of the sewer system and, if those revenues prove insufficient, from the unlimited ad valorem taxing power of Calderwood County. This security is best described as:

1. A.A pure revenue bond, because sewer system revenues are the first source of payment.Incorrect. A pure revenue bond has ONLY the project revenue stream behind it. Here a general government has pledged its taxing power as a second source.
2. B.A double-barreled bond.Correct. Two legally binding sources of payment - project revenues plus the county's unlimited ad valorem taxing power - is the definition of a double-barreled bond, and it is generally analyzed as a general obligation credit.
3. C.An industrial development revenue bond backed by a corporate lessee.Incorrect. An industrial development bond is repaid by a private corporate lessee, not by a public sewer system's revenues and a county tax pledge.
4. D.A moral obligation bond, because the county's support is discretionary.Incorrect. In a moral obligation structure the legislature MAY appropriate funds but is not required to. Here the ad valorem tax pledge is legally binding.

Why: A bond with two distinct and legally enforceable sources of payment - a project revenue stream plus the full faith, credit and taxing power of a general purpose government - is a double-barreled bond. Because the taxing pledge is a genuine backstop rather than a courtesy, these bonds are generally analyzed and rated as general obligation credits and usually carry lower yields than a comparable pure revenue bond.

A revenue bond differs from a general obligation bond because it is backed by...

1. A.The issuer's common stockMunicipalities do not issue stock.
2. B.The revenue of the specific project it financesCorrect — revenue bonds rely on project income, not taxing power.
3. C.The U.S. TreasuryMunicipal bonds are not backed by the federal government.
4. D.The full faith, credit, and taxing power of the municipalityThat backs a general obligation bond, not a revenue bond.

Why: A revenue bond is backed only by the income of the specific project it finances, with no claim on the issuer's general taxing power.

The Ridgemont Regional Transit Authority's official notice of sale requires every bidder to enclose a GOOD FAITH DEPOSIT with its sealed bid. Three syndicates bid, the award is made, and the losing syndicates ask about their money. What happens to the deposits?

1. A.The issuer retains all deposits as compensation for the cost of soliciting and evaluating the bids.Wrong. The deposit secures performance; it is not a fee for running the sale.
2. B.All deposits are held until the winning syndicate has fully reoffered the bonds to the public.Wrong. Losing bidders are released at award; the reoffering timetable is irrelevant to them.
3. C.Unsuccessful bidders get their deposits back promptly after the award, and the winner's deposit is applied against the purchase price at settlement or forfeited if it fails to take delivery.Correct. Return, credit at settlement, or forfeiture on default are the three possible outcomes.
4. D.Only the winning syndicate posts a deposit; losing bidders are not required to submit one.Wrong. The notice of sale requires a deposit from every bidder, which is what makes bids credible.

Why: The good faith deposit is security for the bidder's performance, not a fee. It demonstrates that a bidder is serious and gives the issuer a remedy if the winner fails to take delivery and pay for the bonds. Deposits of unsuccessful bidders are returned promptly once the award is made, since those firms have no further obligation. The winning syndicate's deposit is credited against the purchase price at settlement, and it is forfeited to the issuer only if the winner defaults on its commitment to take the bonds.