Temporary securities: Overview, definition, and example
What are temporary securities?
Temporary securities refer to short-term financial instruments issued as placeholders for permanent securities in a securities offering, such as stocks, bonds, or other types of investments. They are typically issued when the permanent securities are not yet available or are in the process of being finalized. Temporary securities allow the holders to begin trading or participating in the offering before the final, permanent securities are issued.
Temporary securities are often issued in the form of certificates, receipts, or other instruments that can be exchanged for the permanent securities once they are ready. For example, temporary securities can be issued in a bond offering until the final bond certificates are printed and distributed to the investors.
Why are temporary securities important?
Temporary securities are important because they help facilitate transactions and maintain liquidity in the market, even when the permanent securities are not yet available. They allow investors to start receiving benefits, such as interest payments or dividends, and potentially begin trading the securities before the permanent instruments are issued. For issuers, temporary securities help ensure that they can meet demand and provide access to their offerings while waiting for the final legal or administrative steps to be completed.
In many cases, temporary securities also serve as a way to comply with securities regulations and prevent delays in the issuance of the final securities, providing a bridge between the offering and the actual delivery of the permanent securities.
Understanding temporary securities through an example
Imagine a company is conducting a public offering of bonds, but the official bond certificates are not yet ready to be issued. To avoid delaying the offering and to allow investors to participate, the company issues temporary securities in the form of temporary bond certificates. These temporary certificates provide investors with the right to receive the permanent bonds once they are issued. Investors may also be able to trade these temporary bonds in the secondary market until the permanent bonds are available.
In another example, a company might issue temporary stock certificates to investors during a public offering while the final, permanent stock certificates are being processed. These temporary securities allow investors to begin trading their shares immediately and receive any applicable dividends, but the temporary securities are exchanged for the permanent certificates once they are available.
An example of a temporary securities clause
Here’s how a temporary securities clause might look in an offering document:
“The Company will issue temporary securities in the form of temporary bond certificates to the Subscribers upon the completion of the offering. These temporary certificates will be exchangeable for permanent bond certificates once they have been fully prepared and registered. Temporary securities will bear the same interest rates and terms as the permanent securities and may be traded in the interim period.”
Conclusion
Temporary securities play a vital role in ensuring that securities offerings proceed smoothly and without unnecessary delays. They provide a way for investors to begin trading, receiving dividends, or earning interest on their investments, even before the permanent securities are issued. For issuers, temporary securities help maintain market activity and fulfill regulatory requirements, ensuring that the process of issuing permanent securities is not delayed unnecessarily.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.