Quick Answer
The Uniform Securities Act defines "security" broadly, including notes, stock, bonds, and investment contracts, but excludes insurance and fixed annuity contracts. Variable annuities are securities. The Howey test determines whether an unusual arrangement is an "investment contract": money invested in a common enterprise with profits expected solely (in practice, primarily) from others' efforts.
Whether a "security" exists at all is a threshold question. If an instrument does not meet the USA's definition, none of the registration methods in this unit ever come into play.
What Instruments Are Included in the Definition of "Security"?
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 of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing
What Is Excluded From the Definition of "Security"?
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.
What Is 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.
What Should You Check on Exam Day?
- Confirm whether an annuity is fixed (not a security) or variable (a security) before applying any registration rule to it.
- Apply all four Howey elements before calling an arrangement an investment contract; missing even one element defeats the classification.
- Remember "solely from the efforts of others" is tested as "primarily" or "predominantly," not literally "solely."
- Recognize that a certificate of deposit only counts as a security when it is a certificate of deposit for a security, not an ordinary bank CD.