Quick Answer
A "person" under the Uniform Securities Act is nearly any individual or entity, but never a minor, deceased, or mentally incompetent individual. A "security" is broad; the Howey Test tags investment contracts. Insurance with the word "fixed," commodities, and real estate are not securities. Offers and sales both trigger the Act.
The whole vocabulary unit on one sheet: who is a person, what is (and is not) a security, the Howey Test, offers and sales, and issuer versus non-issuer transactions.
Who IS and Is NOT a "Person"
- A person is almost any individual or entity: an individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government, or political subdivision.
- Only three are NOT persons: a minor, a deceased individual, and a mentally incompetent individual (all lack legal capacity or standing).
- A government IS a person. A city issuing municipal bonds is a person acting as an issuer.
What IS a Security
- Traditional named securities: stock (common, preferred, treasury), bonds, debentures, notes, evidence of indebtedness.
- Pooled and participation interests: investment contracts, limited partnership interests, collateral-trust certificates, voting-trust certificates, preorganization subscriptions, transferable shares, oil/gas/mining participations.
- Derivatives: warrants, rights, options, and a certificate of deposit for a security (a receipt for a deposited security).
- Variable insurance products: variable annuities and variable life (the policyholder bears the investment risk).
- Mutual fund shares, and passive LLC interests that meet the Howey Test.
What is NOT a Security
- Fixed insurance: fixed annuities, whole life, term life, endowment, disability (the insurer bears the risk).
- Commodities and commodity futures, collectibles, physical precious metals, direct real estate, and currency.
- Bank certificates of deposit (traditional, FDIC-insured) and fixed-rate bank deposits.
- The underlying asset is not a security, but the pooled interest IS: physical gold is not, a gold ETF is; direct real estate is not, a REIT or real estate limited partnership is.
The One-Liners That Win Points
- All FOUR Howey prongs must be met: investment of money, in a common enterprise, with expectation of profit, from the efforts of others. Miss one, and it is not an investment contract.
- If the word "variable" is in the insurance product name, it IS a security; if "fixed," it is NOT.
- A note is presumed to be a security, but personal loans, short-term consumer notes, and home mortgage notes rebut that presumption.
- Both an offer (an attempt or solicitation) and a sale (a disposition for value) trigger the Act; you do not need a completed transaction.
- Issuer vs non-issuer turns on one question: who receives the proceeds? Issuer gets them = issuer transaction; anyone else = non-issuer.
Top Gotchas
- "Efforts of others" is not zero effort by the investor. Courts loosened the original "solely" to "primarily," so active management by the investor fails prong four.
- A "free" bonus security IS a sale, and a gift of assessable stock IS a sale (the recipient may owe future assessments, so value is involved).
- A bona fide pledge is NOT a sale, but foreclosure IS. A stock dividend is NOT a sale, but only when the shareholder could elect cash and chose stock.
- A bank CD is not a security; a certificate of deposit for a security is. The names collide; the instruments do not.
- Oil, gas, and mining interests have NO identifiable issuer, unique among securities.
- "Secondary offering" is not "secondary market," but both are non-issuer transactions because the issuer does not receive the proceeds.
One-Breath Recap
A person is nearly anyone or any entity, including a government, but never a minor, a deceased, or a mentally incompetent individual. A security is broad; the four-prong Howey Test (investment of money in a common enterprise expecting profit from others' efforts) captures investment contracts, and all four prongs must hold. Variable insurance, pooled interests, and receipts for deposited securities are securities; fixed insurance, commodities, direct real estate, and bank CDs are not. Both offers and sales trigger the Act, bonus and assessable-stock gifts count as sales, and issuer versus non-issuer comes down to who pockets the proceeds.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Key Definitions Under the USA unit for the complete lesson.