The legal definition of a security encompasses much more than traditional stocks and bonds. The registration provisions apply to a wide range of investments and instruments including "investment contracts." Many unorthodox investment schemes may be viewed as securities under the catchall "investment contract" contained in the statutory definition of a security. For example, see

  • SEC v. W.J. Howey Co. - the US Supreme Court found an investment contract to be "an investment of money with the expectation of profits solely form the efforst of promoters or third parties."
  • Smith v. Gross - the Ninth Circuit applied prior precedent, which "held that despite the Supreme Court's sue of the word 'solely,' the third element of the Howey [investment contract[ test is whether the efforst made by those other than the investors are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise."

The consequences of an item being found to be a security are several

  • 1) The item must be registered or met the requirements for registration
  • 2) Securities laws' general antifraud rules apply to statements made and allegation of nondisclosure
  • 3) The person who sold the item may be classified as a broker-dealer and may be rquired to have been registered as such; and
  • 4) Any credit extended to the purchaser to facilitate the acquisition may be subject to the margin rules laid down by the various regulatory authorities.

The Securities Act of 1933, regarded as the first plank in the platform of regulatory reform, governs the initial issuance of securities by corporations themselves.

The Congressional drafters of the Securities Act of 1933 incorporated into that act what has come to be known as the full fair and disclosure philosophy. The full disclosure philosophy states that issuers of securiites may do whatever they wish, so long as the registration statement and prospectus (part 1 of the registration filed with SE) fully and fairly disclose what it is that they propose to do. Beyond requirements for filing and for prospectus delivery federal securities regulation...

This act mandates preparation and filing of an extensive registration statements for the sale of securities, unless the seller fits within an exemption from registration, and delivery to investors of a prospectus describing the securities offered, the corporation's products or services, its principal plants and facilities, its management, and its finances.

The 1933 Act also contains liability provisions applicable to public offerings of securities, to other oral and writen offers to sell, and to registration violations.

Before a single share or unit of paritcipation is offered for sale, there must be registration, or an exemption therefrom, both on the federal level and, traditionally, in each state in which the security will be offerd for sale. The Securities Act of 1933 imposes strict liability for registration violation by entites who sell unregistered securities. There are also criminal penalities which are enforced.

The National Market Improvements Act of 1996, however, removed from the states their plenary power to regulate issuances of "covered securities." There are several categories of "covered securities" but the most important are issuances by SEC reporting corporations and issuances that are part of a fully registered SEC public offering. Under the Act, states may require only a brief notification form. They may also collect the fees (sometimes very large) that they formerly collected. Invoking the Commerce Clause of the U.S. Constitution, however, Congress has decreed that states securities commissions may no longer require the filing of disclosure documents, much less documents that conform to varying state requriements or engage in merit regulation, with regard to covered securities.

Securities Exchange Act of 1934