As we previously noted, the general requirement is that securities sold in the state must be registered with the state. Of course, there are exceptions to, and exemptions from, this rule. The USA states the following:
"It is unlawful for a person to offer or sell a security in this State unless:
- the security is a federal covered security;
- the security, transaction, or offer is exempted from registration... or
- the security is registered under this [Act]."
The official comment then says that:
"Except for federal covered securities, exempt securities, or securities offered or sold in exempt transactions, no sale of a security may be made in this State before the security is registered."
Exam Tips and Tricks
The term "Security" is vitally important to the USA and for passing the Series 63 exam, so be sure you can sort out what are, and what are not,considered securities under the USA. It is not at all necessary to memorize all that are considered. A more rational approach is to know what is not a security. Below, we\'ll look more closely at those.
Three Tests to Determine if an Investment Contract is a Security
If you need a review at this point, go back and take another look at the definition of a federal covered security. Remember, this term first came into securities law with the National Securities Markets Improvement Act (NSMIA) of 1996. It is only in the 2002 version of the USA and in NASAA documents that this law is taken into account.
There are three tests to determine when an investment contract is a security. They are:
- Is it an investment of money?
- Is it in a common enterprise?
- Are its profits to come solely from the efforts of others?
This definition comes directly from the language of a United States Supreme Court decision in the case of United States v. W.J. Howey Company in 1946. The words from the decision were; "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others."
To demonstrate, let's apply these three tests to a security that we're all familiar with: common stock. The person who buys the stock is pooling his/her money with the investments of many other people - a common enterprise. The investor obviously will only risk his/her capital in the expectation of a return on the investment - a profit. The investor may vote on the board of directors, but has no direct control over the management of the company in which the money is invested, so he/she expects the profits to come from the efforts of others. These tests have proven that a stock certificate is definitely "investment contract".
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