Key Takeaways

  • A face-amount certificate company issues debt securities that guarantee repayment of a fixed sum (the face amount) at a future date.
  • Investors either make periodic installment payments or pay a lump sum for a fully paid certificate.
  • These companies must maintain strict certificate reserves and comply with SEC rules to protect investors.
  • FACs are secured by company assets, similar to secured bonds, which often allows lower borrowing costs.
  • Modern regulations and market changes have made these companies less common, but they remain a recognized type of investment company under U.S. law.

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.

How a Face-Amount Certificate Works

A face-amount certificate (FAC) is essentially a contract between an investor and the issuing company. The investor agrees to pay the issuer either in periodic installments or as a single upfront payment. In return, the issuer promises to pay the investor a predetermined fixed amount at a future maturity date.

FACs are considered debt securities, meaning they represent a loan from the investor to the issuing face-amount certificate company. Because the company’s assets or other securities often back these contracts, the risk is generally lower than unsecured debt. However, unlike stocks, investors do not receive ownership or voting rights.

For example, if an investor purchases a $10,000 certificate, they might pay $100 per month for several years or a one-time payment at the start. At maturity, the company pays back the $10,000 face amount plus any contractual interest.

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)."

Legal and Regulatory Oversight

Face-amount certificate companies fall under the Investment Company Act of 1940, which imposes strict requirements on how they operate. They must register with the Securities and Exchange Commission (SEC) and adhere to specific standards for reserve maintenance and disclosures.

The goal of these regulations is to safeguard investors, ensuring that companies have sufficient assets to meet their obligations. Many states also have their own rules requiring deposits or reserves for certificates issued to residents. These overlapping federal and state rules add an extra layer of protection.

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.

Risks and Investor Considerations

While face-amount certificate companies provide a guaranteed payout, there are still risks to consider:

  • Liquidity Risk: Certificates typically must be held until maturity, limiting investor flexibility.
  • Credit Risk: If the issuing company becomes insolvent, investors may face delays or losses despite reserve requirements.
  • Inflation Risk: The fixed payout may lose purchasing power over time.
  • Limited Returns: Compared to stocks or mutual funds, FACs generally provide conservative returns.

Because of these limitations, face-amount certificate companies are far less common today than in the past. Many investors prefer mutual funds, ETFs, or annuities, which provide more flexibility and potentially higher returns.

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.

Historical and Modern Use

Face-amount certificate companies played a larger role in early 20th-century investing, especially before mutual funds became widespread. At that time, they provided investors with a simple way to save and earn fixed returns backed by a company’s assets.

Today, however, the use of FACs has declined significantly. Most new investors turn to other regulated investment vehicles, though some long-standing contracts still remain in force. Despite their decline, they continue to be recognized under federal law as a type of registered investment company.

Frequently Asked Questions

  1. What is a face-amount certificate company?
    It’s an investment company that issues face-amount certificates—contracts guaranteeing repayment of a fixed sum at a future date.
  2. Are face-amount certificates safe investments?
    They are relatively secure since they are backed by company assets, but risks include insolvency, inflation, and limited returns.
  3. How do investors pay for a face-amount certificate?
    Investors can either pay in periodic installments or make a lump sum payment for a fully paid certificate.
  4. Are face-amount certificate companies still common?
    No, they were more popular in the early 20th century. Today, other investment options such as mutual funds and ETFs have largely replaced them.
  5. What laws regulate face-amount certificate companies?
    They are regulated by the Investment Company Act of 1940 and must comply with SEC requirements and, in some cases, state-level reserve rules.

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