§ 41-08-18 — (8-202) Issuer's responsibility and defenses - Notice of defect or defense

1. Even against a purchaser for value and without notice, the terms of a certificated
security include terms stated on the certificate and terms made part of the security by
reference on the certificate to another instrument, indenture, or document or to a
constitution, statute, ordinance, rule, regulation, order, or the like, to the extent the
terms referred to do not conflict with terms stated on the certificate. A reference under

this subsection does not of itself charge a purchaser for value with notice of a defect
going to the validity of the security, even if the certificate expressly states that a person
accepting it admits notice. The terms of an uncertificated security include those stated
in any instrument, indenture, or document or in a constitution, statute, ordinance, rule,
regulation, order, or the like, pursuant to which the security is issued.
2. The following rules apply if an issuer asserts that a security is not valid:
a. A security other than one issued by a government or governmental subdivision,
agency, or instrumentality, even though issued with a defect going to its validity, is
valid in the hands of a purchaser for value and without notice of the particular
defect unless the defect involves a violation of a constitutional provision. In that
case, the security is valid in the hands of a purchaser for value and without notice
of the defect, other than one who takes by original issue.
b. Subdivision a applies to an issuer that is a government or governmental
subdivision, agency, or instrumentality only if there has been substantial
compliance with the legal requirements governing the issue or the issuer has
received a substantial consideration for the issue as a whole or for the particular
security and a stated purpose of the issue is one for which the issuer has power
to borrow money or issue the security.
3. Except as otherwise provided in section 41-08-21, lack of genuineness of a certificated
security is a complete defense, even against a purchaser for value and without notice.
4. All other defenses of the issuer of a security, including nondelivery and conditional
delivery of a certificated security, are ineffective against a purchaser for value who has
taken the certificated security without notice of the particular defense.
5. This section does not affect the right of a party to cancel a contract for a security
"when, as and if issued" or "when distributed" in the event of a material change in the
character of the security that is the subject of the contract or in the plan or
arrangement pursuant to which the security is to be issued or distributed.
6. If a security is held by a securities intermediary against whom an entitlement holder
has a security entitlement with respect to the security, the issuer may not assert any
defense that the issuer could not assert if the entitlement holder held the security
directly.