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.

Which One-Liners Win Points?

• The Howey test needs ALL four prongs: money invested, in a common enterprise, expecting profits, primarily from others' efforts. Miss one and it's not an investment contract, though it could be a security under another category (stock, note, bond).
• Variable annuities ARE securities (value tracks underlying investments); fixed annuities, whole/term life, ordinary/indexed universal life (variable universal life IS a security), bank certificates of deposit, and ordinary commodities futures are NOT.
• Notice filing is NOT a registration method; it's a fee-plus-copy notification for federal covered securities.
• Exempt security = the stuff is exempt (durable, though not always irrevocable); 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.

Which Numbers Matter Most?

Which Definitions Must You Nail?

• Offer vs. sale: an offer is any attempt to dispose of, or solicitation to buy, a security for value; a sale is a binding contract to sell or a completed disposition for value.
• Two triggers: a bonus security is a sale when bundled into a larger transaction involving value, and a gift of assessable stock (stock subject to a future call for payment) is an offer and sale on its own, no bundling required, since the recipient can be called for value later.
• Federal covered security also includes bank and government securities. Exception: a municipal security is NOT federal covered in the state where its issuer is located, though that state needs no registration either way, since municipal securities are already an exempt security under state law.

Which Registration or Exemption Path Applies?

• 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 stock, debt, and qualifying guaranteed securities, NOT variable annuities or variable life.
• A control person's open-market sale is still a non-issuer transaction under state law, separate from the federal restricted-stock resale safe harbor (holding period, volume limits, Form 144) that may apply to the same seller.

Who Is an Accredited Investor?

• Natural persons: income test ($200,000 individual / $300,000 joint with spouse or spousal equivalent over each of the last 2 years, same expected this year) OR net worth over $1 million (with spouse or spousal equivalent) excluding the primary residence.
• Directors, executive officers, and general partners of the issuer qualify automatically as accredited investors.

What Are the Three Investment Company Types?

• Management company: the catch-all category (anything not a UIT or face-amount certificate company); can be actively OR passively managed; splits into open-end (mutual funds, unlimited shares redeemed at net asset value) and closed-end (shares trade on exchanges at market price, not permanently fixed since follow-on/rights offerings are possible).

What Antifraud Power Do States Keep?

• The administrator can investigate, bring enforcement actions, and issue cease-and-desist orders regardless of registration status.
• Principal trading is allowed but needs written, per-transaction disclosure and consent before completion; an agency cross transaction (broker for the other side) can use advance written consent for future trades.

Which Gotchas Trip Students Up?

• Any valid Regulation D private placement is federal covered, including traditional (no general solicitation) offerings to non-accredited sophisticated purchasers: 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.
• A minor, a deceased individual, or someone mentally incompetent is still a "person" under the Act; none excluded. Those conditions instead trigger cancellation of a registration, not exclusion, the most common wrong answer.

Which Memory Aids Should You 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.
• Exempt s-ecurity = the s-tuff is exempt; exempt t-ransaction = the t-rade is exempt.

One-Breath Recap

A security is read broadly; an investment contract is caught only when all four Howey prongs are met (money, common enterprise, expected profits, efforts of others), so economic reality beats the label: a variable annuity counts, a fixed annuity does not. Securities register federally on disclosure, never SEC approval, and by state through coordination, qualification, or filing, unless an exempt security or transaction applies; transaction exemptions never carry to resales. Federal covered securities escape state registration, though fund shares and Regulation D placements may owe a notice filing while exchange-listed shares owe none. Accredited status turns on $200,000 or $300,000 income, $1 million net worth excluding the home, credentials, insider roles, or an entity's $5 million test. States keep unwaivable antifraud authority: exempt from registration never means exempt from fraud liability.

Need more than the recap? Read the full Securities and Issuer Regulation unit.