Sale (Uniform Securities Act Definition)

On Monday, Rosalie Kentmere telephones an agent and agrees to buy 1,000 shares at a stated price; the trade is executed that afternoon. The confirmation is mailed Tuesday, payment is made Wednesday, and the shares are delivered to her account on Thursday. For purposes of the Uniform Securities Act, the sale occurred on:

1. A.Monday, when the binding contract to buy the shares was madeCorrect. The definition of sale includes a contract of sale or contract to sell, so it is complete at agreement.
2. B.Tuesday, when the confirmation was sent to the customerA confirmation records the transaction; it does not constitute it.
3. C.Wednesday, when the purchase price was paidPayment is a settlement step. The contract to sell already existed.
4. D.Thursday, when the shares were delivered into her accountDelivery completes settlement, not the sale as the Act defines it.

Why: The Act defines "sale" to include every CONTRACT OF SALE OF, CONTRACT TO SELL, OR DISPOSITION OF a security for value. A binding agreement to buy at a stated price is a contract to sell, so the sale is complete when that agreement is made - Monday - regardless of when the confirmation goes out, when money moves, or when certificates or book entries are delivered. This matters in practice: it fixes the date from which limitation periods run, and it determines whether the seller and the security had to be registered or exempt at the moment of the agreement rather than at settlement.

Under its incentive plan, Tarnbeck Instruments grants each of its senior engineers options to buy 5,000 shares of Tarnbeck common stock at a fixed price. The engineers pay nothing for the options, which vest over four years. Under the Uniform Securities Act, the options are:

1. A.not securities, because the engineers paid nothing for themConsideration bears on whether a sale occurred, not on whether the instrument is a security.
2. B.not securities, because they are compensation for employment rather than investmentsAn instrument does not cease to be a security because it is delivered as compensation.
3. C.not securities until they are exercised and the underlying shares are issuedThe option is a security from the moment it exists; it does not wait on exercise.
4. D.securities, because the definition expressly includes any warrant or right to subscribe to or purchase a securityCorrect. An option on the employer's stock is a right to purchase a security and is therefore itself a security.

Why: The definition of a security expressly includes any WARRANT OR RIGHT TO SUBSCRIBE TO OR PURCHASE a listed instrument, so an option on the employer's common stock is a security in its own right, quite apart from the shares it may one day be exercised for. Whether the GRANT was a "sale" is a separate question, since a sale requires a disposition for value and the engineers paid nothing. That distinction is worth keeping straight: an instrument can be a security even where the transaction that put it in someone's hands was not a sale, and the antifraud provisions do not depend on a sale having occurred.

Under a plan of reorganization confirmed by a bankruptcy court, unsecured creditors of Broughmore Rail surrender their claims and receive newly issued common stock of the reorganized company. No cash changes hands and no creditor may decline. A creditor argues that the issuance was an unregistered sale of securities in his state. Under the Uniform Securities Act, the issuance:

1. A.was a sale, because the creditors gave up valuable claims and received securities in returnValue passing is ordinarily enough, but the Act specifically removes judicially approved reorganization exchanges from the definition of sale.
2. B.was not a sale, because an act incident to a judicially approved reorganization in which securities are issued in exchange for outstanding claims is excluded from the definition of saleCorrect. The exclusion applies to acts incident to a judicially approved reorganization.
3. C.was not a sale, because the newly issued common stock of a reorganized company is not a security until it trades publiclyThe shares are securities on issuance. The exclusion operates on the definition of sale, not of security.
4. D.was a sale, but an exempt one, so the creditor may still sue for failure to deliver a prospectusIf no sale occurred, no exempt-transaction analysis or prospectus obligation arises.

Why: Whether new stock is a security and whether its issuance is a SALE are different questions. The Act defines "sale" and then removes several things from it, including any act incident to a JUDICIALLY APPROVED REORGANIZATION in which a security is issued in exchange for one or more outstanding securities, claims or property interests. Exchanging claims for new stock under a confirmed plan is squarely that. The reasoning is that a court has already reviewed the exchange and the recipients are not being solicited to invest - they are creditors whose claims are being restructured, and the protections of registration would add cost without adding scrutiny. The new shares remain securities; they simply were not sold.