Evidence of indebtedness

Evidence of indebtedness is a term used in the law of both labor and securities to indicate written agreements for enforceable obligations to pay a debt. For example, a company might hire a person to perform work, but then issue an IOU to indicate payment for the work is owed to the worker. The law of many nations discourages this practice (see History of labour law), because they believe most companies have an advantage over individual workers in terms of bargaining power.
Similarly, many legal authorities perceive the practice of issuing evidence of indebtedness as an opportunity for parties with strong bargaining power to take advantage of others with relatively less bargaining power. This can let the strong force the weak into one-sided agreements with unfair terms and conditions. For example, a large company may contract with a small company to provide goods or services to the larger firm. At the promised time for payment, the large may indicate it cannot pay on time and offers an agreement which appears to promise to pay the debt. If the small firm accepts, it may do so without sufficient information (or the sophistication to use it) to have comparable bargaining power to the large firm. The result may be payment on terms unfair to the small firm so as to result in a loss relative to the originally promised payment (or even no payment at all if the agreement is deemed "unenforceable" by the courts of law).
The securities laws of the United States (and many of its constituent states) treat evidence of indebtedness as a security, which is regulated by the government. This is intended to promote fairness in the securities transaction leading to the evidences of indebtedness agreement by assuring both information and sophistication of the parties in the bargaining process.
For example under United States law, Securities Act of 1933, Section 2, 15 U.S.C.A. § 77b(a)(1) defines "Evidence of indebtedness" "to mean 'all contractual obligations to pay in the future for consideration presently received,'" as interpretted by the US 10th Circuit Court in the case U.S v. Austin, 462 F.2d 724, 736 (10th Cir.1972). This definition means any agreement which is an "Evidence of indebtedness" is a security under US Federal law and must therefore be registered with the federal SEC or else be proven the agreement or transaction are exempt from such registration. Typically this means the party issuing the securitiy must show the second party(ies) had sufficient information and sophistication for fair bargaining between them in order for the sale of securities to be a private placement by not being a public sale via a "public solicitation" per Securities and Exchange Commission v. Ralston Purina Co., 346 U.S. 119 (1953).

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