KRS 355.8-202: Issuer's responsibility and defenses -- Notice of defect of 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) Paragraph (a) of this subsection 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 KRS 355.8 -205, 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.