Securities are a type of investment that hold tradeable value. They can take many forms, including stocks issued by a government or shares in a company. They are commonly offered for purchase by companies or individuals looking to raise money to make an investment or other purchase of their own. However, existing securities held over a business can make purchasing that business more complex, so it is important to identify any existing securities when entering into a business sale agreement.
There are multiple categories of securities, with the most common being equity securities and debt securities.
Equity securities represent an ownership interest held by shareholders in a company, partnership or trust, often referred to as shares. An individual who holds shares in a company is generally granted certain rights to deal with the company, including rights of partial ownership, rights to vote in company decisions, some entitlements to receive a portion of future profits through dividends and some claim on the residual assets of a company if it is wound up.
Debt securities, also known as debentures, represent a loan by investors to a company in exchanged for a regular and fixed interest rate for the term of the investment. It entitles the holder of the debt security to regular payments of interest, and the eventual repayment of the loan in full.
Buyers of businesses often use equity securities (issuing shares) and debt securities (selling debentures) to finance an acquisition.
Some securities, known as hybrid securities, possess qualities of both equity securities and debt securities.
Options to acquire shares are also considered to be securities in certain circumstances, such as under section 92 of the Corporations Act 2001 (Cth) (‘the Act’). An option is an optional right to obtain ownership of something (in s 92, shares) in the future. The value of an option is derived from the value of whatever the option-holder has a right to claim ownership over.
Securities are an important consideration in financial transactions like business sales.
It is important that anybody looking to buy or sell a business does their due diligence and discovers any existing securities over that business, as this can affect the conditions that need to be met before that business can be sold and what disclosures need to be made to the Australian Securities and Investments Commission (ASIC). If securities are not reported or misclassified as other forms of investment, it can lead to breaches of statutory provisions, exposure to penalties, reputational harm and the risk of invalidating transactions.
Securities are referred to throughout the Act (and in other legislation) in a variety of places, as they are central to the regulation of financial markets. The term is defined differently depending on the context in which it is used, so it is important to refer to the relevant sections of the Act to determine whether the instrument or interest you are considering is properly defined as a security or not. For instance, in Chapter 6 of the Act, concerning corporate takeovers and related matters, the definition of securities excludes market-traded options to acquire shares. However, in Chapter 7, governing financial services and markets, options are considered to be securities.
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