Yesterday I was doing some research for a caller asking about solicitors for investment advisers in the State of Texas. As usual, I got distracted by something else at the Texas State Securities Board’s website, and I wanted to share the following with the community. It’s very easy to read, and it makes some important points about securities in terms of how they’re defined and how much trouble you could get yourself into by violating registration requirements:

In recent years licensed insurance agents nationwide have been recruited by promoters of illegal schemes to sell unregistered investment products to the public in Texas and elsewhere. These products have included promissory notes issued or guaranteed by offshore entities, brokered certificates of deposit, contracts for the sale and leaseback of telephone and ATM equipment, and resort “timeshare” investments. Typically these schemes have been directed at senior citizens. As under the federal securities law, the Texas Securities Act defines the term “security” broadly to encompass virtually any instrument that might be sold as an investment. The law requires that securities and persons offering securities for sale in Texas must be registered with the Securities Commissioner unless a specific exemption from registration applies. It is a third degree felony for a person to violate a registration requirement.

Notice how the way an “instrument” is offered and sold is material to determining if the “instrument” is, in fact, a “security.” This explains why the SEC includes certain equity indexed annuities under the definition of a “security,” due largely to the method that the EIA’s are marketed and sold. If the EIA is marketed as a product with some upside, and with an uncertain return over the years, and if it’s offered as a way to replace other securities investments . . . well, that was close enough for the securities regulators.

So, there are very few investments that do not meet the definition of a “security.” Whole life, term life, and fixed annuities are not securities. Commodities futures contracts are not securities. Fully insured bank CD’s are banking products. But even in those cases, read the facts presented in the test question very carefully as you try to determine what is and is not a “security.”

In the real world, consult an attorney. Seriously. I wouldn’t sell shares of an S-corp to your brother-in-law without first digging into your state’s securities regulations and paying an attorney to advise you.

Examzone.com

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