Definition of a Security




Posted by on July 28, 2016

The concept of defining a security is fundamental to knowing the application of the securities laws in general and the specific ability to rely on specific rights and exemptions, such as the registration and exemption requirements and Rule 144.

Both the Securities Act and the Securities Exchange Act of 1934 contain definitions of a security and both are extremely broad. In fact, it was the congressional intent that the definition of security be very broad to encompass all forms of investment instruments and contracts that may be used in the commercial world.

Section 2(a)(1) of the Securities Act defines a security as:

The term “security” means any note, stock, treasury stock, security future, security-based swap, 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, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Section 3(a)(10) of Exchange Act defines a security as:

The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

Although the definitions are extremely broad, case law and SEC guidance over the years have drilled down on two particular aspects of the definition that require a facts and circumstances analysis – in particular related to an investment contract and a debt instrument. In the Lawcast in this series I will begin my discussion on each starting with an investment contract.