Legal Definitions - assessable security

An assessable security refers to a type of investment, such as a stock or bond, where the owner can be legally required to pay additional funds beyond the initial purchase price. Unlike most modern securities where an investor's liability is typically limited to the amount they paid for the investment, an assessable security carries the risk of future financial demands from the issuer (the company or entity that issued the security). These additional payments, known as "assessments," are usually stipulated in the terms of the security and might be levied if the issuer faces financial distress, needs to cover losses, or requires additional capital for specific purposes.

• Example 1: Shares in a struggling mutual insurance company

  Imagine a small, older mutual insurance company that issued shares to its policyholders many years ago. The terms of these shares stated that in the event of severe financial losses or insolvency, shareholders could be assessed an additional amount, up to a certain percentage of their original investment, to help the company meet its obligations. If a major natural disaster causes the company to incur massive claims that deplete its reserves, it might activate this provision, requiring shareholders to pay extra funds.

  Explanation: This illustrates an assessable security because the shareholders, despite having already paid for their shares, are legally obligated to contribute more money when the company faces financial hardship, as per the original terms of their investment.

• Example 2: Limited partnership interests in a real estate development

  A group of investors forms a limited partnership to fund a large commercial real estate development. The partnership agreement specifies that while initial capital contributions are set, the general partner has the authority to call for additional capital contributions (assessments) from the limited partners if unforeseen construction costs arise or if market conditions require additional funding to complete the project successfully.

  Explanation: Here, the limited partnership interest acts as an assessable security because the limited partners, beyond their initial investment, can be required to provide more capital if the project encounters financial needs, as outlined in their partnership agreement.

• Example 3: Membership shares in a cooperative bank with a special assessment clause

  Some older cooperative banks or credit unions, particularly those established with specific community-based charters, might have membership shares that include a clause allowing for special assessments. If such a cooperative experiences a significant, unexpected loss due to a widespread economic downturn or a large loan default that threatens its solvency, its board of directors might be authorized to levy a special assessment on its members (shareholders) to recapitalize the institution and ensure its continued operation.

  Explanation: This scenario demonstrates an assessable security because the members, who hold shares in the cooperative, can be compelled to pay additional funds beyond their initial membership contribution to help the institution recover from financial difficulties, based on the terms of their membership.