Securities

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:

1. An investment of money
2. In a common enterprise
3. With the expectation of profits
4. 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:

1. It is registered under the USA, OR
2. The security or transaction qualifies for one of the USA exempt-securities or exempt-transactions lists, OR
3. 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?

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.

A stop order normally requires prior notice, an opportunity for a hearing, and written findings of fact and conclusions of law. The one exception is a summary order, which takes effect immediately:

• The Administrator may postpone or suspend a registration statement's effectiveness at once, pending the outcome of the proceeding
• The Administrator must then promptly notify the affected parties of the order and the reasons for it
• That notice must also tell them the matter will be set for hearing within 15 days after a written request is received
• If no one requests a hearing and the Administrator does not order one, the order remains in effect until modified or vacated

Exam Tip: Gotchas

• The 15 days runs from the request, not from the order. The clock starts when the Administrator receives a written request for a hearing. A summary order entered on the first of the month with no request filed has no hearing deadline running against it at all.
• Silence favors the order. A summary stop order does not lapse on its own if no hearing is requested. It remains in force indefinitely until the Administrator modifies or vacates it, so the burden sits with the registrant to ask.
• 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?

For most federal covered categories, such as investment company securities and Regulation D offerings, 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: an irrevocable filing appointing the Administrator as the issuer's agent to receive legal process, which gives the state jurisdiction to serve the issuer in an enforcement action even though it cannot require registration
• A filing fee

For a Regulation D offering, the issuer files Form D with the SEC no later than 15 calendar days after the first sale of securities in the offering. A state's notice filing for that covered security is typically a copy of that Form D plus the consent to service of process and a fee.

Exchange-listed securities are the exception. Being listed on a national exchange is itself one of the federal covered categories (see the table below), and federal law bars states from requiring any filing or fee at all on these securities, not just registration.

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. The Administrator may issue a stop order against a federal covered security only if BOTH conditions are met: (1) the order is in the public interest, AND (2) there is a failure to comply with a notice condition (such as a missed notice filing or fee). Exchange-listed securities never had a notice-filing requirement to begin with, so there is nothing to fail to do, and the Administrator may not issue a stop order against them for this reason. The state's only authority over an exchange-listed security is antifraud enforcement.
• The 15-day Form D clock runs from the first sale in the offering, not from the start of the offering and not from the date the registration or notice materials were prepared. It is 15 calendar days, and if day 15 lands on a weekend or holiday the filing is due the next business day.

What Are the Categories of Federal Covered Securities?

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.
• A municipal security is federal covered everywhere except the state where its issuer is located. A bond issued by the city of Columbus, Ohio is a federal covered security in the other 49 states, but not in Ohio itself: Ohio can still require state registration or an applicable state exemption for its own issuer's bonds.

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.

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.

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?

Who Qualifies as an Accredited Investor?

The SEC's accredited-investor definition covers more ground than any single test. The two financial tests below are the ones most often tested, but a natural person can also qualify through an SEC-designated professional certification, and entities have their own separate test:

• Net worth test: individual or joint net worth over $1,000,000, excluding the value of the person's primary residence
• Income test: individual income over $200,000 (or joint income with a spouse over $300,000) in each of the two most recent years, with a reasonable expectation of reaching that same income level in the current year
• Professional-certification test: a natural person holding in good standing an SEC-designated professional certification or license (for example, a Series 7, Series 65, or Series 82 license) qualifies as accredited without needing to meet either financial test
• Entity test: a corporation, trust, LLC, or similar entity not formed for the specific purpose of buying the offered securities qualifies as accredited if it has total assets over $5,000,000

A natural person only needs to meet one of the tests that applies to individuals, not all of them.

How Does an Issuer Verify Accredited Status?

The verified-accredited-investor private placement requires more than a signed form. The issuer must take reasonable steps to verify each purchaser's accredited status, and the SEC recognizes several acceptable methods:

• Income basis: reviewing IRS forms (W-2, 1099, Schedule K-1, Form 1040) for the two most recent years, plus a written representation from the investor
• Net worth basis: reviewing bank statements, brokerage statements, tax assessments, or appraisal reports for assets, plus a consumer credit report for liabilities
• Third-party confirmation: written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant (CPA) stating that they verified the investor's status within the prior three months

A signed questionnaire in which the investor simply states they are accredited, or an oral confirmation, does not satisfy this requirement on its own.

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, self-certification of accredited status is acceptable, federal covered.
• Verified-accredited-investor private placement: advertising OK, ZERO non-accredited, self-certification alone is NOT enough (the issuer must independently verify, since a public ad could reach unaccredited investors), 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.

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 Is the Intrastate Offering Exemption?

The intrastate offering exemption is a federal-only exemption from SEC registration for a purely local offering. To qualify:

• The issuer must be a resident of, and doing business in, the state
• Every offeree and purchaser must be a resident of that same state
• Resales to non-residents are restricted for a period after the offering

This exemption is federal registration relief only. It does not exempt the offering from state registration. The issuer still must register the offering with the state (registration by qualification is the usual route here, since there is no federal registration statement to coordinate with) or find a separate state-law exemption.

Exam Tip: Gotchas

• "Intrastate" is a federal exemption, not a state one. An offering that qualifies for the intrastate safe harbor still needs state registration or a state exemption; the federal exemption only removes the SEC registration requirement.
• Every purchaser, not just most, must be a resident of the issuer's state. A single out-of-state purchaser can destroy the exemption for the whole offering.

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?
• Do you know what satisfies the reasonable-steps-to-verify requirement for the verified-accredited-investor private placement (tax returns, or written confirmation from a CPA, attorney, broker-dealer, or investment adviser), and that self-certification alone is not enough?
• Can you state the accredited-investor thresholds: net worth over $1,000,000 excluding the primary residence, or income over $200,000 individual / $300,000 joint in each of the last two years, and do you know a natural person can also qualify through an SEC-designated professional certification (such as a Series 7, 65, or 82 license) or an entity through a $5,000,000 total-assets test?
• Do you know that the intrastate offering exemption is a federal-only exemption that still requires state registration or a state exemption, and that every purchaser must be a state resident?
• Do you know the notice-filing and stop-order rules for federal covered securities: Form D goes to the SEC no later than 15 calendar days after the first sale in the offering, and a state stop order requires BOTH a public-interest finding AND a failure to comply with a notice condition?