Quick Answer
A security is defined by the Howey Test (money in a common enterprise, expecting profits from others' efforts). States register securities three ways: filing (notification), coordination (with the SEC), and qualification (state only). Exempt securities are exempt by what they are; exempt transactions by how they are sold. Federal covered securities escape state registration entirely.
The whole unit on one sheet: what counts as a security, the three registration methods, the two flavors of exemption, and the federal preemption the exam loves to test.
The One-Liners That Win Points
- The Howey Test makes something an investment contract (a security): investment of money, in a common enterprise, expecting profits, derived solely from the efforts of others.
- Variable annuities and variable life insurance ARE securities (returns ride a separate account); fixed annuities and whole life are NOT (insurer guarantees a fixed sum).
- A bank certificate of deposit (CD) is NOT a security; a "certificate of deposit for a security" (like an American Depositary Receipt, or ADR) IS.
- Registration by filing (notification): seasoned issuers meeting strict thresholds; auto-effective when the federal registration is, once on file at least 5 business days.
- Registration by coordination: the go-to for initial public offerings (IPOs); auto-effective with the federal registration once on file at least 10 days.
- Registration by qualification: the ONLY method needing no concurrent federal filing; effective ONLY when the Administrator (the state securities regulator) so orders.
- Exclusion = never a security; exemption = a security released from registration. Burden of proving an exemption is on whoever claims it.
- A federal covered security cannot be required to register at the state level (National Securities Markets Improvement Act preemption); states may only demand a notice filing.
Numbers to Lock In
| Item | Value |
|---|---|
| Registration effective period (all 3 methods) | 1 year from effective date |
| Filing method: minimum on file before effective | 5 business days |
| Coordination: minimum on file / pricing on file | 10 days / 2 full business days |
| Small-issue private-placement cap (Regulation D) | up to $10 million / 12 months |
| Traditional private placement: non-accredited cap | up to 35 sophisticated investors |
| Limited-offering exemption: offeree limit | no more than 10 persons / 12 months |
| Preorganization certificate: subscriber limit | no more than 10 (no payment allowed) |
| Commercial paper exemption | maturity 9 months or less, $50,000 minimum |
| Employee-benefit-plan security notice | 30 days advance written notice to the Administrator |
| Regulation A Tier 1 / Tier 2 caps | $20 million / $75 million per 12 months |
Memory Aid: SCAM (Securities Exchange Act of 1934)
The '34 Act protects investors from scams by establishing:
- S - SEC creation + Federal Reserve Board (FRB) margin authority + Reg T
- C - Credit regulation (margin rules)
- A - Antifraud (the federal antifraud rule)
- M - Anti-Manipulation (wash trades, matched orders, painting the tape)
Distinct from the Securities Act of 1933, which governs new-issue registration, disclosure, and prospectus delivery.
Top Gotchas
- Exempt security vs exempt transaction: an exempt security is exempt by WHAT it is (government, bank, exchange-listed); an exempt transaction is exempt by HOW it is sold (isolated non-issuer, unsolicited order, institutional sale). The same security can be exempt in one trade and require registration in another.
- Coordination vs qualification effectiveness: coordination goes effective automatically the instant the federal registration does (once state conditions are met); qualification is effective ONLY when the Administrator orders it, at the Administrator's discretion.
- Nothing is exempt from antifraud. Exempt securities, exempt transactions, and federal covered securities are all exempt from REGISTRATION only; the Administrator keeps full antifraud authority over every one.
- The limited-offering exemption counts OFFEREES, not buyers (no more than 10 persons), and institutional buyers are excluded from the count.
- Both Regulation D private-placement variants are federal covered (states cannot require registration), but the small-issue exemption (up to $10 million / 12 months) is NOT: states can require full registration. Same split for Regulation A (Tier 2 preempts, Tier 1 does not).
- The Administrator can revoke exchange-listed, nonprofit, employee-benefit-plan, and ALL exempt-transaction exemptions, but cannot revoke government or bank securities exemptions.
One-Breath Recap
A security is anything that passes the Howey Test (money in a common enterprise, profits from others' efforts), so variable annuities are in and fixed annuities are out. States register securities three ways: filing (notification, seasoned issuers, auto-effective), coordination (paired with the SEC, the IPO workhorse, auto-effective), and qualification (state-only, effective only when the Administrator orders it), and all three last one year. Exempt securities are exempt by what they are, exempt transactions by how they are sold, and federal covered securities escape state registration entirely under the National Securities Markets Improvement Act, but nothing, ever, is exempt from antifraud.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Securities and Issuer Regulation unit for the complete lesson.