What IS a Security
With the statutory definition and the Howey Test in hand, you can now identify the full range of instruments that qualify as securities under the Uniform Securities Act (USA).
Traditional Securities
These instruments are explicitly named in the USA definition and are always considered securities:
| Instrument | Key Detail |
|---|---|
| Common stock | Equity ownership in a corporation with voting rights |
| Preferred stock | Equity with priority dividends, usually no voting rights |
| Treasury stock | Previously issued stock reacquired by the corporation |
| Bonds | Debt obligations of corporations or governments |
| Debentures | Unsecured corporate debt (backed only by creditworthiness) |
| Notes | Debt instruments; presumed to be securities |
| Evidence of indebtedness | Broad category covering various debt instruments |
Investment Contracts and Participations
These instruments qualify as securities because they involve pooled investments or participation in profits:
| Instrument | Key Detail |
|---|---|
| Investment contracts | Determined by the Howey Test |
| Certificates of interest or participation in a profit-sharing agreement | E.g., interests in a limited partnership |
| Collateral-trust certificates | Certificates backed by a pool of collateral |
| Preorganization certificates or subscriptions | Subscriptions to buy stock before a company is formally organized |
| Transferable shares | Shares that can be transferred between investors |
| Voting-trust certificates | Certificates issued when shareholders transfer voting rights to a trustee |
| Oil, gas, or mining interests | Certificates of interest or participation in production payments |
Derivative and Related Instruments
| Instrument | Key Detail |
|---|---|
| Warrants | Rights to purchase a security at a specified price |
| Rights | Short-term privileges to subscribe to new shares |
| Options | Rights to buy or sell a security at a specified price |
| Certificates of deposit for a security | A receipt showing that a security has been deposited somewhere |
Exam Tip: Gotchas
- A certificate of deposit for a security is NOT the same as a bank CD. A bank CD is NOT a security. A certificate of deposit for a security is essentially a receipt for a deposited security; it IS a security. This distinction is frequently tested.
Variable Insurance Products
| Instrument | Key Detail |
|---|---|
| Variable annuities | Annuity where the payout varies based on investment performance |
| Variable life insurance | Life insurance with an investment component tied to market performance |
Why are variable products securities?
- In variable products, the investment risk is borne by the policyholder - the payout depends on how the underlying investments perform
- In fixed products (not securities), the insurance company bears the investment risk and guarantees a fixed payout
- The Supreme Court confirmed in SEC v. Variable Annuity Life Insurance Co. (1959) that variable annuities are securities under federal law
Exam Tip: Gotchas
- If the word "variable" appears in the name of an insurance product, it IS a security. If the word "fixed" appears, it is NOT a security. The key: in variable products, the policyholder bears the investment risk; in fixed products, the insurance company does.
Pooled Investments and Passive Interests
| Instrument | Key Detail |
|---|---|
| Mutual fund shares | Shares in open-end investment companies |
| Limited partnership interests | Typically qualify as investment contracts (passive investors rely on an active general partner) |
| Interests in LLCs | When investors are passive and meet the Howey Test |
Limited partnerships are a classic Howey Test example:
- Limited partners invest money (prong 1)
- Their capital is pooled in a common enterprise (prong 2)
- They expect profits (prong 3)
- Profits come from the general partner's management efforts (prong 4)
Exam Tip: Gotchas
- Not all LLC interests are securities. Only when the members are passive and the Howey Test is met does an LLC interest qualify as a security. If a member actively manages the business, prong 4 fails.