Securities and Issuer Regulation

The whole unit on one sheet: what counts as a security, how it registers, which exemptions apply, who is accredited, the three investment-company types, and the antifraud rule that never goes away.

The One-Liners That Win Points

• The Howey test needs ALL four prongs: investment of money, in a common enterprise, expecting profits, primarily from the efforts of others. Miss one and it is not a security.
• Economic reality controls, not the label. A "membership," "token," or "interest" is a security if all four prongs are met.
• Variable annuities ARE securities (value tracks underlying investments); fixed annuities, whole/term/universal life, bank certificates of deposit, and commodities futures are NOT.
• Federal registration is disclosure, not approval. If a question says "the SEC approved the security," it is wrong.
• Non-issuer transaction = proceeds go to the selling shareholder, not the issuer; most secondary-market trades qualify.
• Registration by coordination rides along with the federal filing and goes effective when the SEC filing does; registration by qualification is state-only and the only method letting the administrator impose conditions like escrow of proceeds.
• Notice filing is NOT a registration method; it is a fee-plus-copy notification for federal covered securities.
• Exempt security = the stuff is exempt (permanent); exempt transaction = the trade is exempt (one-time). Transaction exemptions do NOT carry over to resales.
• Exempt from registration is NOT exempt from antifraud. The single most tested idea in the unit.

Numbers to Lock In

Key Definitions to Nail

• Offer / sale: any attempt to dispose of, or solicit a purchase of, a security for value. A gift or bonus security CAN be a sale if it is part of a larger transaction involving value.
• NOT an offer or sale: bona fide pledges or loans, stock dividends (nothing of value given), stock splits.
• Federal covered security: state registration is preempted (exchange-listed securities, registered-investment-company shares, sales to qualified purchasers, and private placements sold only to accredited investors). States may still charge notice-filing fees and enforce antifraud.
• Issuer: any person who issues or proposes to issue a security; person is defined broadly to reach nearly any legal entity.

Registration and Exemption Map

• Federal: issuer files a registration statement with the SEC; the SEC declares it effective (disclosure standard); a prospectus goes to purchasers.
• State methods: coordination (with the SEC filing, effective together), qualification (state-only, most burdensome, administrator sets the date and can require escrow), and filing/notification (seasoned issuers, simplified, auto-effective if not rejected).
• Exempt securities (product itself exempt): government and agency securities, municipal securities, bank and savings-institution securities, insurance-company securities, and exchange-listed securities. The insurance exemption covers the company's own stock, NOT variable annuities or variable life.
• State exempt transactions: private placements, issuer-underwriter transactions, isolated non-issuer trades, unsolicited brokerage transactions, and institutional-investor sales.
• Federal private-placement exemptions: traditional (no general solicitation; self-certification acceptable) versus verified-accredited (general solicitation allowed; all investors accredited AND verified). Both produce federal covered securities; the small-issue exemption does not.

Accredited Investor Fast Facts

• Natural persons: income test ($200,000 individual / $300,000 joint over each of the last 2 years, same expected this year) OR net worth over $1 million excluding the primary residence.
• Professional credentials: General Securities Representative, Investment Adviser Representative, and Private Securities Offerings Representative license holders qualify regardless of wealth.
• Insiders: directors, executive officers, or general partners of the issuer qualify.
• Entities: banks, insurers, and registered investment companies qualify automatically; benefit plans, business entities, charities, and family offices need over $5 million (a business entity formed just to buy the offering does NOT qualify).

Investment Company Types (remember MUF)

• Management company: has a board and an adviser; splits into open-end (mutual funds, unlimited shares redeemed at net asset value) and closed-end (fixed shares that trade on exchanges at market price).
• Unit investment trust: fixed, unmanaged portfolio; no board, no adviser; redeemable units; has a termination date.
• Face-amount certificate company: issues debt certificates paying face value at maturity; nearly extinct but still testable.
• Fund exemptions: the small-investor private-fund exemption (fewer than 100 owners) and the qualified-purchaser private-fund exemption (qualified purchasers only) keep hedge and private-equity funds out of investment-company status; antifraud still applies.

State Antifraud Authority

• States keep full antifraud authority over ALL securities activity: federal covered, exempt securities, exempt transactions, and registered securities alike. No exception.
• The administrator can investigate, bring enforcement actions, and issue cease-and-desist orders regardless of registration status.
• No waiver is ever valid. Any contract trying to waive antifraud protection is void, even for accredited or sophisticated investors.
• Federal preemption strips state registration power over federal covered securities but explicitly preserves antifraud authority.

Top Gotchas

• Regulation-D-style private placements sold only to accredited investors are federal covered: states cannot require registration but CAN collect notice-filing fees and enforce antifraud.
• The small-issue exemption (up to $10 million / 12 months) does NOT create a federal covered security; states keep full registration authority there.
• Self-certification is fine for the traditional (no-solicitation) exemption but NOT for the general-solicitation exemption, which demands reasonable verification steps.
• The primary residence is excluded from the net worth test; students forget this constantly.
• Unit investment trusts have no board, no adviser, and no active management; do not confuse them with management companies.
• Exempt from registration is never exempt from antifraud, even for U.S. government bonds and fully exempt transactions.

Memory Aids to Hold Onto

• 200 / 300 / 1M: $200K individual income, $300K joint income, $1M net worth (excluding the primary residence).
• MUF: Management companies, Unit investment trusts, Face-amount certificate companies (the three investment-company types).
• Exempt s-ecurity = the s-tuff is exempt (permanent); exempt t-ransaction = the t-rade is exempt (one-time).

One-Breath Recap

A security is read broadly, and any investment contract is caught only when all four Howey prongs (money, common enterprise, expected profits, efforts of others) are met, so economic reality beats the label and a variable annuity counts while a fixed annuity does not. Securities register federally on a disclosure standard (never SEC approval) and by state through coordination, qualification, or filing, unless an exempt-security or exempt-transaction path applies, and remember that transaction exemptions do not carry to resales. Federal covered securities (exchange-listed shares, fund shares, qualified-purchaser sales, and accredited-only private placements) escape state registration but still owe notice filings and fees, while the small-issue exemption up to $10 million leaves full state registration in place. Accredited status turns on $200K/$300K income or $1M net worth excluding the home, licensed credentials, insider roles, or over $5 million in entity assets. Above all, states keep unwaivable antifraud authority over every security and transaction, so exempt from registration never means 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.