Megaphone
W
hat Is a Security?
The Securities Act and Securities Exchange Act have broad definitions of the term „se-
curity” (see Basic Terms for Shareholders and Investors to brush up on your securities
terminology). Under these Acts, a security includes many familiar investment instru-
ments such as notes, stocks, bonds, and investment contracts.
Whether a certain investment is considered a security is important, because designation
as a security means that the investment is subject to certain registration requirements.
In general, all securities offered in the U.S. must be registered with the Securities and
Exchange Commission (SEC), although there are some exceptions - a company offering
securities that are not exempt must register them, a process that also involves disclosu-
re of certain information, including:
• A description of the company’s properties and business purpose
• A description of the security being offered
• Information about the company’s management
• Financial statements about the company, certified by independent accountants
Under the Howey Test, a transaction is an investment contract if:
1. It is an investment of money
2. There is an expectation of profits from the investment
3. The investment of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party