Key Definitions

Before you can understand how securities are regulated, you need to know what qualifies as a security, and several related terms that appear throughout the Uniform Securities Act (USA).

What Counts as an Offer or Sale Under the USA?

These two terms define when securities regulation kicks in.

• Offer: Every attempt or offer to dispose of, or solicitation of an offer to buy, a security for value
• Sale: Every contract of sale of, contract to sell, or disposition of a security for value
• A security given as a bonus on a purchase (e.g., "buy this security, get shares of another free") is a sale, because the purchaser gave value for the whole package
• A purported gift of assessable stock (stock subject to a future call for payment) is treated as an offer and sale, since the recipient can be called on for value later

What does NOT count as an offer or sale:

• Bona fide pledges or loans (using securities as collateral)
• Stock dividends (if nothing of value is given by the shareholder)
• Stock splits

Exam Tip: Gotchas

• Not every "gift" or "bonus" is excluded. A bonus security tied to a purchase, or a gift of assessable stock, CAN be treated as a sale under the USA. An ordinary stock dividend where the shareholder gives nothing of value is excluded.

What Counts as a Security Under the USA?

The USA uses a broad definition of "security" that includes:

• Stocks, bonds, notes, debentures
• Investment contracts
• Certificates of interest or participation
• Voting trust certificates
• Limited partnership interests
• Variable annuities
• Collateral trust certificates, preorganization certificates, and many more

What Is the Howey Test?

The Supreme Court case SEC v. W.J. Howey Co. established a four-part test to determine whether an arrangement qualifies as an investment contract (and therefore a security). All four prongs must be met:

Key principle: The Howey Test looks at the economic reality of the transaction, not what it's called. A "membership," "token," or "interest" can still be a security if all four prongs are met.

Think of it this way: If you give someone money, pool it with other investors, expect to profit, and rely on someone else to do the work, you have bought a security, regardless of what the seller calls it.

Exam Tip: Gotchas

• The Howey Test requires ALL four prongs. If any one is missing, the arrangement is not an investment contract; but it could still be a security under a different category (e.g., a stock, note, or bond), since "investment contract" is just one of many enumerated types of securities.

What Is NOT a Security?

Exam Tip: Gotchas

• Variable annuities ARE securities (because their value depends on the performance of underlying investments). Fixed annuities are NOT. The word "variable" is your clue.

What Is a Federal Covered Security?

A federal covered security is a security where federal law preempts state registration requirements. The National Securities Markets Improvement Act of 1996 (NSMIA) created this category.

Think of it this way: Federal covered securities have already cleared the bar at the federal level, so states cannot add their own registration requirements on top. States can still charge notice-filing fees and go after fraud, and (for certain categories) can suspend an offering that fails to make its required notice filing.

Federal covered securities include:

• Securities listed on national exchanges (NYSE, Nasdaq, AMEX/NYSE American)
• Securities issued by registered investment companies (mutual funds, ETFs)
• Securities sold to qualified purchasers
• Securities sold through a valid Regulation D private-placement exemption (both the traditional exemption, which can include up to 35 non-accredited sophisticated purchasers, and the verified-accredited-investor exemption are federal covered; not just offerings limited to accredited investors). The Regulation D small-issue exemption is different and does NOT produce a federal covered security
• Bank and government securities, with one exception: a municipal security is NOT federal covered in the state where its issuer is located

What states CAN and CANNOT do with federal covered securities:

• Require state registration: No
• Require notice filings and fees: Yes, except exchange-listed securities (which owe no filing or fee at all)
• Enforce antifraud provisions: Yes

Exam Tip: Gotchas

• A valid Regulation D private-placement offering is a federal covered security, whether or not it includes non-accredited purchasers. States cannot require registration for these offerings, but they CAN collect notice filing fees and enforce antifraud rules. This distinction is frequently tested.
• 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 federal covered in the other 49 states. In Ohio itself, the bond simply isn't federal covered; but municipal securities are already an exempt security under the Uniform Securities Act, so Ohio doesn't require registration either way; it just isn't limited from doing so by federal preemption the way it would be for out-of-state investors.
• Stop order for notice-filing failure applies to non-listed federal covered securities (investment company shares and Regulation D placements are the commonly tested examples), 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 on them at all, so there is nothing to fail to do, and the Administrator separately has no stop order power over them at all. The state's only authority over an exchange-listed security is antifraud enforcement.

Who Counts as a Person Under the USA?

The Act defines a person by listing what qualifies. The list is deliberately wide:

• An individual
• A corporation
• A partnership
• An association
• A joint-stock company
• A trust where the beneficiaries' interests are evidenced by a security
• An unincorporated organization
• A government, or a political subdivision of a government

Read that list twice, because what it leaves out matters more than what it includes.

Does the Act Exclude Minors or Deceased Individuals?

No. The definition states no carve-out for a minor, a deceased individual, or a person adjudicated mentally incompetent. Each is still an individual, and an individual is a person.

Study sheets and older prep material often claim the opposite. They are confusing two separate ideas:

Legal capacity governs who can be held to an agreement. The Act's definition governs who falls under the statute at all. A question that mixes them is testing whether you can keep them apart.

Think of it this way: A deceased individual's account does not vanish from the Act's reach. It passes to an estate or a legal representative, who deals with it. Nothing about the definition erases the individual.

Exam Tip: Gotchas

• Do not pick "a minor," "a deceased individual," or "a mentally incompetent individual" as the answer to which party is NOT a person. The Act excludes none of them. This is the most common wrong answer on the definition.
• Those same three conditions do appear elsewhere, which is what makes the trap work. Death, an adjudication of mental incompetence, and being unlocatable are grounds for cancellation of a registration. Cancellation is nonpunitive housekeeping, a completely different provision from the definition of a person.
• A government is a person. Students reject this because a state cannot be sued the way a company can. The definition names governments and their political subdivisions outright.

Who Counts as an Issuer Under the USA?

• Any person who issues or proposes to issue a security
• For certain certificates of interest/participation and unincorporated investment trusts, the issuer is the depositor or manager; for certificates of interest or participation in oil, gas, or mining titles, the Act treats there as being no issuer at all
• Understanding this term matters for distinguishing issuer from non-issuer transactions

What Is a Non-Issuer Transaction?

• A transaction in which the proceeds do NOT go to the issuer
• Most everyday stock market transactions are non-issuer transactions (secondary market trades)
• Example: You buy shares of Apple on the NYSE. Apple doesn't receive the money; the seller does

Issuer vs. non-issuer transaction:

Exam Tip: Gotchas

• Control-person or affiliate status does not change this classification. A control person selling personal shares on the open market is still a non-issuer transaction: the test asks only who receives the proceeds. Separately, federal law may require that control person to satisfy the restricted-stock resale safe harbor (holding period, volume limits, and a Form 144 filing above certain thresholds; see Restricted Stock and Resale Restrictions). That federal resale question is distinct from the state-law issuer/non-issuer classification tested here.

What Should You Check on Exam Day?

• Can you name what does NOT count as an offer or sale: bona fide pledges or loans, stock dividends with nothing of value given, and stock splits?
• Can you recite all four Howey Test prongs and explain that all four are required, not just some?
• Do you know that variable annuities ARE securities but fixed annuities are NOT?
• Can you list what a federal covered security includes, and the one exception (a municipal security in its issuer's home state)?
• Do you know what states CAN and CANNOT require for federal covered securities: no registration, but yes to notice filings/fees (except exchange-listed securities) and antifraud enforcement?
• Can you distinguish an issuer transaction (proceeds to the issuer) from a non-issuer transaction (proceeds to the seller)?
• Do you know the Act excludes no one from "person" on grounds of age, death, or mental incompetence, and that those three conditions belong to the cancellation rule instead?
• Can you keep a control person's open-market sale (still non-issuer under state law) separate from the federal restricted-stock resale safe harbor conditions that may apply to that same seller?