A face-amount certificate company is an investment firm that issues debt securities to investors. When a contract between an investor and an issuer is made that guarantees a fixed sum — or face amount — to the investor at a predetermined future date, it is a face-amount certificate (FAC). The investor in this contract pays a set amount of money in periodic installments or a lump sum in return for future payment. If a lump sum is paid for the certificate, it is known as a "fully paid" face amount certificate.

Face-Amount Certificate Company Technique

A company can obtain financing at low-interest rates using the face-amount certificate company technique. This is made possible because the debt is backed by tangible assets that are under the control of the company. This is similar to how secured bond issuers are able to pay less interest than unsecured debt issuers. As an investor who possesses a face-amount certificate, you are paid a set amount in annual interest and then receive a refund of the face amount or principal of securities at a predetermined end date.

Certificate Reserve Requirements

Certificate requirements specify that it is in the interests of the public or to ensure that investors are protected by requiring face-amount certificate companies to deposit and maintain with one or more institutions. The institutions must meet the following qualifications:

"The Commission shall by rule, regulation, or order, in the public interest or for the protection of investors, require a registered face-amount certificate company to deposit and maintain, upon such terms and conditions as the Commission shall prescribe and as are appropriate for the protection of investors, with one or more institutions having the qualifications required by paragraph (1) of section 80a–26(a) of this title for a trustee of a unit investment trust, all or any part of the investments maintained by such company as certificate reserve requirements under the provisions of subsection (b) hereof: Provided, however, that where qualified investments are maintained on deposit by such company in respect of its liabilities under certificates issued to or held by residents of any State as required by the statute of such State or by any order, regulation, or requirement of such State or any official or agency thereof, the amount so on deposit, but not to exceed the amount of reserves required by subsection (a) hereof for the certificates so issued or held, shall be deducted from the amount of qualified investments that may be required to be deposited hereunder.
Assets which are qualified investments under subsection (b) and which are deposited under or as permitted by this subsection, may be used and shall be considered as a part of the assets required to be maintained under the provisions of said subsection (b)."

Liability Requirements

The holders of any registered face-amount certificate company must know that is it unlawful to issue or sell any face-amount certificate or to collect or accept any payment on any such certificate issued by such company on or after the effective date of this subchapter.

Face-Amount Certificate Disclosure Requirements

Holders of face-amount certificate companies have specific disclosure requirements they must follow. These include the following stipulations:

  • Any registered face-amount certificate company must maintain the minimum certificate reserve on all outstanding face-amount certificates issued prior to the effective date of this chapter.
  • Any dividends on the shares of the company during any calendar year which exceed one-third of the net earnings for the next preceding calendar year or that exceeds 10 percent of the total net earnings for the following five calendar years, whichever is the less.
  • Thirty (30) days must pass before the company can declare, pay, or distribute any dividend. The company will announce its plan in writing to declare, pay, or distribute; and if at any time it appears the payment or distribution of any dividend for or during any calendar year might impact the financial integrity of the company or its ability to meet its liabilities under its outstanding face-amount certificates, it may by order forbid the declaration, distribution, or payment of any such dividend.

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