Definition of Securities and Issuers

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 Counts as a "Person"?

• A person is almost any individual or entity: an individual, corporation, partnership, association, joint-stock company, a trust where the interests of the beneficiaries are evidenced by a security, unincorporated organization, government, or political subdivision. Note the trust qualifier: an ordinary trust is outside the definition.
• The Act does not exclude a minor, a deceased individual, or a mentally incompetent individual from the definition of "person." Legal capacity to enter an enforceable contract is a separate question.
• 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.

Which One-Liners 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.
• "Variable" vs. "fixed" in the product name is a strong clue, not the test itself; who bears the investment risk (policyholder vs. insurer) controls.
• 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.
• Any offer or sale of a warrant, right, or convertible security is deemed to include an offer of the underlying security, continuously, for as long as the purchase right or conversion privilege stays exercisable.
• Issuer means any person who issues or proposes to issue a security; special rules name the depositor or manager as issuer for CDs, voting-trust certificates, and collateral-trust certificates, plus certain unit investment trusts.
• Issuer vs non-issuer starts with who receives the proceeds, but that is not the whole test: an arrangement that pays someone else can still be an issuer transaction if it indirectly benefits the issuer.
• Beyond bonus securities, assessable-stock gifts, pledges, and stock dividends, the USA also excludes a class vote on a merger, consolidation, reclassification, or qualifying asset sale, and a judicially approved reorganization, from "offer" and "sale."

Which Gotchas Trip Students Up?

• "Efforts of others" is not zero effort by the investor. Courts loosened the original "solely" to "primarily," so some investor involvement is fine; prong four fails only when profits depend primarily on the investor's own efforts.
• 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 gift of non-assessable stock is NOT a sale, because the holder owes nothing now or later. That result comes from the words "for value," not from the USA's exclusion list, which never names it.
• A bona fide pledge is NOT a sale, but foreclosure IS. A stock dividend is NOT a sale, and no cash election is required for that. If an election is offered, surrendering the right to the cash dividend is expressly not "value," so the exclusion still holds. It fails only if stockholders give something else of value.
• A bank CD is not a security; a certificate of deposit for a security is. The names collide; the instruments do not.
• Certificates of interest or participation in oil, gas, or mining titles, leases, or production payments have NO identifiable issuer, unique among securities.
• "Secondary offering" is not "secondary market," but both are ordinarily non-issuer transactions, since neither directly or indirectly benefits the issuer.

One-Breath Recap

A person is nearly anyone or any entity, including a government; capacity to contract is a separate question, so the Act does not carve out 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 turns on whether the issuer directly or indirectly benefits, not merely who is paid.

Need more than the recap? Read the full Definition of Securities and Issuers unit.