Quick Answer
The Howey Test defines an investment contract; fixed annuities aren't securities but variable annuities are. States register securities by filing, coordination, or qualification, each valid one year. Exempt securities (by type) and exempt transactions (by sale method) skip registration but never antifraud rules; federal covered securities bypass state registration entirely.
This section covers the definition of a security under the Uniform Securities Act (USA), what is and is not a security, state registration methods, federal covered securities under the Securities Act of 1933 (SA 1933), exempt securities, exempt transactions, Regulation D private placements, and Regulation A.
What Is a Security Under the USA?
What Does the Statutory Definition Include?
A security includes any of the following:
- 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
- Certificate of interest or participation in an oil/gas/mining title or lease
- Any interest or instrument commonly known as a "security"
- Any warrant or right to subscribe to or purchase any of the foregoing
What Is the Howey Test?
An investment contract exists when there is:
- An investment of money
- In a common enterprise
- With the expectation of profits
- Derived solely from the efforts of others
The Howey Test is used to determine whether unusual instruments (e.g., orange groves, cryptocurrency offerings) qualify as securities.
What Is NOT a Security?
- Fixed annuities - insurance or endowment policy under which an insurance company promises to pay a fixed sum of money (insurance product, not a security)
- Variable annuities ARE securities - payments depend on the investment results of a segregated fund
Exam Tip: Gotchas
- Fixed annuities and whole life insurance are NOT securities because the insurance company guarantees a fixed payment. Variable annuities and variable life insurance ARE securities because returns depend on the performance of a separate account invested in securities.
- A certificate of deposit (CD) at a bank is NOT a security. But a "certificate of deposit for a security" IS a security. The exam tests this distinction.
How Do States Register Securities?
When Is Registration Required?
It is unlawful to offer or sell any security in a state unless:
- It is registered under the USA, OR
- The security or transaction qualifies for one of the USA exempt-securities or exempt-transactions lists, OR
- It is a federal covered security
A registration statement may be filed by the issuer, any other person on whose behalf the offering is to be made, or a registered broker-dealer.
What Are the Three Methods of State Registration?
| Feature | Registration by Filing | Registration by Coordination | Registration by Qualification |
|---|---|---|---|
| Also called | Registration by notification | Coordination with SEC | Qualification with state only |
| Prerequisite | Federal registration statement filed under SA 1933; issuer meets strict eligibility criteria | Federal registration statement filed under SA 1933 in connection with the same offering | None: any security may use this method |
| Who uses it | Seasoned issuers meeting financial thresholds; open-end investment companies/unit investment trusts (UITs) | Most common method for initial public offerings (IPOs) and public offerings simultaneously registered with the SEC | Intrastate offerings (single state); issuers not filing with the SEC |
| Effective date | Automatically effective when federal registration becomes effective, if state filing on file for at least 5 business days and fee paid | Automatically effective when federal registration becomes effective, if state filing on file for at least 10 days and pricing info on file for 2 full business days | Effective only when the Administrator so orders (Administrator sets the date) |
| SEC involvement | Yes: requires federal registration statement | Yes: requires federal registration statement | No: entirely state-level; SEC has no jurisdiction |
| Key requirements | Issuer in business at least 36 months; class of equity registered under the '34 Act with 500+ holders; net worth of $4M (or $2M with earnings); minimum share price $5 | 3 copies of latest prospectus; undertaking to forward all future amendments; pricing information | Most extensive disclosure: officer/director info, capitalization, use of proceeds, financial statements, legal opinion, specimen of security |
How Long Does Registration Last?
Registration is effective for 1 year from its effective date (not the filing date).
What Post-Registration Requirements Can the Administrator Impose?
A securities registration is not simply granted and forgotten. While it is effective, the Administrator may impose ongoing conditions:
- Escrow and impounding: as a condition of registration by qualification or coordination, the Administrator may require that promotional shares be placed in escrow, and that offering proceeds be impounded until the issuer raises a specified minimum amount
- Periodic reports: while a registration statement is effective, the Administrator may require the person who filed it to file reports no more often than quarterly, to keep the registration information current
- Post-effective amendment: a registration statement may be amended after its effective date to increase the number of securities offered, provided the public offering price and the underwriters' discounts are unchanged
What Is a Stop Order?
The Administrator may issue stop orders to suspend or revoke the effectiveness of a registration statement.
Exam Tip: Gotchas
- Registration by coordination becomes effective at the moment the SEC registration becomes effective, but ONLY if all state conditions are met. If conditions are not yet met, state registration becomes effective as soon as all conditions are satisfied.
- Registration by qualification is the ONLY method that does not require a concurrent federal registration. The effective date is entirely at the Administrator's discretion.
- All three methods are effective for ONE YEAR. The exam may try to distinguish this from broker-dealer (BD) or investment adviser (IA) registrations (which expire on December 31).
What Is the Difference Between an Exemption and an Exclusion?
- Exclusion - the item does not meet the definition of a security (it was never subject to registration)
- Exemption - the item IS a security but has been released from registration requirements
- The burden of proving an exemption is on the person claiming it under the USA
What Are Federal Covered Securities?
A federal covered security is a security designated as "covered" under the federal-covered-security preemption added to the Securities Act of 1933 by the National Securities Markets Improvement Act (NSMIA) of 1996. Federal covered securities are exempt from state registration: states cannot require registration, qualification, or merit review.
What Is a Notice Filing?
States may require a notice filing consisting of:
- Documents filed with the SEC as part of the federal registration statement
- Consent to service of process
- A filing fee
The Administrator retains antifraud authority over federal covered securities.
Exam Tip: Gotchas
- Stop order for notice-filing failure applies to investment company and Reg D securities, not exchange-listed securities. If an investment company (mutual fund, UIT) fails to file the required notice or pay the fee, the Administrator may issue a stop order suspending the offering. Exchange-listed securities are different: the state may not require a notice filing or fee, so there is nothing to fail to do, and the Administrator may not issue a stop order against them. The state's only authority over an exchange-listed security is antifraud enforcement.
What Are the Categories of Federal Covered Securities?
| Category | Examples |
|---|---|
| Exchange-listed securities | Securities listed on NYSE, NASDAQ, AMEX, or other national exchange with substantially similar listing standards |
| Investment company securities | Securities of registered investment companies (mutual funds, UITs, face-amount certificate companies) |
| Securities sold to qualified purchasers | Securities offered/sold to "qualified purchasers" as defined by SEC rule |
| Government and bank securities | Bank securities, government securities (covered under the '33 Act government/bank securities exemption). A municipal security is NOT federal covered in the state where its issuer is located |
| Regulation D offerings | Securities offered under the traditional or verified-accredited-investor private-placement exemptions (the small-issue exemption up to $10M / 12 months is NOT federal covered; Regulation A Tier 2 offerings are federal covered only when listed on a national exchange or sold to qualified purchasers, and Tier 1 is never federal covered) |
Exam Tip: Gotchas
- Private placements under the traditional or verified-accredited-investor exemptions ARE federal covered securities (states cannot require registration). But small-issue offerings under the up-to-$10M / 12-month exemption are NOT federal covered: states can require full registration.
- States cannot block or deny the sale of a federal covered security through registration requirements, but they CAN investigate and take enforcement action for fraud. The Administrator's antifraud authority is never preempted.
- Notice filing is NOT the same as registration. The state cannot impose merit review or additional disclosure requirements beyond what is filed with the SEC.
Which Securities Are Exempt From Registration?
Exempt securities are exempt based on what the security IS (identity of the issuer), not how it is sold. They are exempt from registration requirements but NOT exempt from antifraud provisions.
| Category | Examples |
|---|---|
| Government securities | U.S. government, state, political subdivision, or any agency/instrumentality thereof; includes revenue obligations |
| Canadian/foreign government | Canada, Canadian provinces, foreign governments with U.S. diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor |
| Bank securities | Securities issued, or guaranteed, by a bank organized under federal law, or by a bank, savings institution, or trust company organized and supervised under state law |
| Savings institution securities | Federal savings and loan associations, and building and loan or similar associations organized under state law and authorized to do business in this state |
| Insurance company securities | Securities of insurance companies organized under state law and authorized to do business in this state (does NOT include variable annuities) |
| Federal credit union securities | Federal credit unions, state-organized credit unions, industrial loan associations |
| Regulated utilities/carriers | Railroads, common carriers, public utilities, holding companies subject to Interstate Commerce Commission (ICC) or state rate regulation |
| Exchange-listed securities | Securities listed on NYSE, AMEX, Midwest Stock Exchange; includes senior or equal-rank securities of the same issuer |
| Nonprofit securities | Securities of organizations operated exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes; chambers of commerce; trade/professional associations |
| Short-term commercial paper | Promissory notes/drafts with maturity of 9 months or less, denominations of at least $50,000, rated in top 3 categories |
| Employee benefit plan securities | Investment contracts in connection with employee stock purchase, savings, pension, profit-sharing plans (requires 30-day advance written notice to Administrator) |
Exam Tip: Gotchas
- Exempt securities are exempt from REGISTRATION only. The Administrator retains full antifraud authority over ALL securities, including exempt ones. Fraud is never exempt.
- Exchange-listed securities are exempt at the state level under the USA exempt-securities list. After NSMIA (1996), most are also "federal covered securities" under the federal preemption provision. The exam may test either concept.
- Insurance company securities are exempt, but variable annuities are NOT - because their payments depend on investment performance of a segregated account.
- Commercial paper exemption requires all three conditions: maturity of 9 months or less, denominations of at least $50,000, and a rating in the top 3 categories.
Which Transactions Are Exempt From Registration?
Exempt transactions are exempt based on how the security is sold (the nature of the transaction), not what it is. The same security can be exempt in one transaction and require registration in another.
| Transaction | Key Requirements |
|---|---|
| Isolated non-issuer transaction | Any isolated non-issuer transaction, whether through a broker-dealer or not; must be truly "isolated" (infrequent, not part of a pattern) |
| Non-issuer transaction by registered agent | Security outstanding 90+ days; issuer actually in business (not shell/blank check); sold at current market price; the security is not part of an unsold allotment from the broker-dealer's own underwriting; audited financials available; listed on exchange or issuer in business 3+ years or $2M+ assets |
| Unsolicited brokerage transaction | Non-issuer transaction through a registered broker-dealer (BD) pursuant to an unsolicited order; Administrator may require written acknowledgment from customer |
| Underwriter transactions | Transactions between issuer and underwriter, or among underwriters |
| Mortgage/deed of trust bonds | Bond secured by real or chattel mortgage if entire mortgage and all bonds sold as a unit |
| Fiduciary transactions | Transactions by executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator |
| Bona fide pledges | Pledge transactions without intent to evade the act |
| Institutional buyer transactions | Sales to banks, savings institutions, trust companies, insurance companies, investment companies, pension/profit-sharing trusts, other institutional buyers, or broker-dealers |
| Limited offering exemption | Offers to no more than 10 persons (excluding institutional buyers) in a state during any 12 consecutive months; buyers must be purchasing for investment; no commission paid for soliciting |
| Preorganization certificates | No more than 10 subscribers; no commissions paid; no payment made by subscribers |
| Existing security holder transactions | Offers to existing security holders (e.g., rights offerings); no commissions paid (other than standby commission), OR issuer files notice and Administrator does not disallow within 5 business days |
| Simultaneous registration offers | Offers (not sales) while registration pending under both the USA and the Securities Act of 1933; no stop order in effect |
Exam Tip: Gotchas
- The limited offering exemption counts OFFEREES, not purchasers - offers to no more than 10 persons. Institutional buyers are excluded from the count. The Administrator can increase or decrease this number.
- Unsolicited orders are exempt, but if the broker-dealer recommended the trade (solicited), that is NOT exempt.
- Preorganization certificates require that NO PAYMENT is made. If any subscriber pays money, the exemption is lost.
What Are the Regulation D Private-Placement Exemptions?
| Feature | Small-Issue Exemption (up to $10M / 12 months) | Traditional Private Placement | Verified-Accredited-Investor Private Placement |
|---|---|---|---|
| Maximum offering | $10 million in 12 months | Unlimited | Unlimited |
| Accredited investors | No limit | No limit | No limit (must verify accredited status) |
| Non-accredited investors | No limit | Up to 35 sophisticated investors | None allowed |
| General solicitation | Permitted if sold only in states with registration/exemption | Not permitted | Permitted |
| Federal covered security? | No: subject to state registration | Yes | Yes |
| Resale restrictions | Restricted unless state-registered | Restricted under the restricted-stock resale rule | Restricted under the restricted-stock resale rule |
| SEC filing | Form D | Form D | Form D |
Exam Tip: Gotchas
- Both Reg D private-placement variants (traditional and verified-accredited) ARE federal covered (states cannot require registration). The small-issue exemption (up to $10M / 12 months) is NOT federal covered: states can require full registration.
- Traditional private placement: no advertising, up to 35 non-accredited purchasers, federal covered.
- Verified-accredited-investor private placement: advertising OK, ZERO non-accredited, must verify accredited status, federal covered.
What Is Regulation A?
Regulation A is sometimes called a "mini-registration" or "mini-IPO" because it requires an offering circular (Form 1-A) filed with the SEC. It is NOT technically an exemption from SEC registration; it is a conditional exemption with its own filing requirements.
| Feature | Tier 1 | Tier 2 |
|---|---|---|
| Maximum offering | $20 million in 12 months | $75 million in 12 months |
| Investor limits | None | Non-accredited limited to 10% of annual income or net worth |
| State registration | Subject to state registration (not federal covered) | Preempts state registration (federal covered) if listed on a national exchange or sold to qualified purchasers |
| Financial statements | Not required to be audited | Must be audited |
| Ongoing reporting | None | Semiannual reports required |
| SEC filing | Form 1-A (offering circular) | Form 1-A (offering circular) |
Exam Tip: Gotchas
- Regulation A Tier 2 offerings preempt state registration only when listed on a national exchange or sold to qualified purchasers; Tier 1 offerings do NOT preempt state registration at all. This mirrors the small-issue vs. private-placement distinction under Regulation D: smaller offerings remain subject to state law.
What Should You Check on Exam Day?
- Can you apply the Howey Test's four elements and identify why fixed annuities are not securities but variable annuities are?
- Do you know the difference between a bank CD (not a security) and a "certificate of deposit for a security" (a security)?
- Can you match each of the three state registration methods (filing, coordination, qualification) to its trigger, effective-date rule, and SEC involvement?
- Do you know registration lasts one year from the effective date, not the filing date?
- Can you distinguish an exclusion (never a security) from an exemption (a security released from registration), and who bears the burden of proving an exemption?
- Do you know which categories of securities are federal covered, and that federal covered securities remain subject to state antifraud authority?
- Can you list the USA's exempt-securities and exempt-transactions categories, including which of the Regulation D and Regulation A variants are and are not federal covered?