Definition of "Security"
Now that you understand the registration requirement, the next question is: what counts as a "security"? The answer determines whether the entire registration framework applies.
Included Instruments
The Uniform Securities Act (USA) defines "security" broadly. The following instruments are all considered securities:
- Note, stock, treasury stock, bond, debenture, evidence of indebtedness
- Certificate of interest or participation in any profit-sharing agreement
- Collateral-trust certificate, preorganization certificate or subscription
- Transferable share, investment contract, voting-trust certificate
- Certificate of deposit for a security (not a bank CD)
- Certificate of interest or participation in an oil, gas, or mining title or lease, or in payments out of production
- Any interest or instrument commonly known as a "security"
- Any certificate, guarantee, warrant, or right to subscribe to or purchase any of the foregoing
Excluded Instruments
Not everything that involves money is a security. These are specifically excluded:
- Insurance or endowment policies
- Fixed annuity contracts (where the insurance company promises to pay a fixed sum)
Exam Tip: Gotchas
Variable annuities are NOT excluded - they ARE securities. The key distinction: if the payout is fixed and guaranteed by the insurance company, it is an insurance product. If the payout varies based on the performance of an underlying investment portfolio, it is a security. Fixed annuity = not a security. Variable annuity = security.
The Howey Test
The most important tool for determining whether an unusual arrangement is a security is the Howey test, established in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
An investment contract (and therefore a security) exists when there is:
- An investment of money
- In a common enterprise
- With an expectation of profits
- Derived solely from the efforts of others
All four elements must be present for the instrument to qualify as a security.
| Howey Element | Key Points |
|---|---|
| Investment of money | Cash or other valuable consideration - need not be literal "money" |
| Common enterprise | Investors' fortunes are linked to the success of the enterprise or to each other (horizontal commonality) or to the promoter (vertical commonality) |
| Expectation of profits | Investors expect a financial return (capital appreciation or income), not just consumption use |
| Efforts of others | The essential managerial efforts come from a third party (promoter, manager), not the investor |
Exam Tip: Gotchas
The Howey test uses "solely from the efforts of others," but courts interpret this broadly; it means PRIMARILY or PREDOMINANTLY from the efforts of others. An investor who makes some minor efforts (like voting on a few matters) does not escape the investment contract classification. If you see "solely" vs. "primarily" as answer choices on the exam, choose the broader interpretation.