A customer can buy an exempt security through an exempt transaction and still be defrauded. Registration status answers whether an offering needs state review; it never settles whether the sales conduct is lawful.
Before you recommend or sell an investment, determine what it is, who issues it, and why its offer or sale is lawful. The Administrator is the state securities regulator who administers these requirements.
Apply the 1956 Uniform Securities Act as amended, the model used here. A model becomes binding through state adoption, so check the state's enacted provisions in practice. Section 301 requires state registration for offers and sales unless the security is exempt, the transaction is exempt, or the security is federal covered. 1956 Uniform Securities Act, §301.
Four classifications answer different questions:
- Excluded instrument: The product falls outside the definition of security. The Act's securities-registration requirement does not attach to that product.
- Exempt security: The product is a security, but its qualifying characteristics remove the state registration requirement.
Common mistakes
- Treating a variable annuity like an excluded fixed annuity. Investment-dependent payments prevent reliance on the insurance-company securities exemption.
- Accepting a $50,000, ten-month note as exempt commercial paper. The maturity condition fails even when denomination and rating qualify.
- Counting the seven purchasers instead of the nine noninstitutional offerees. The limited-offering count follows offerees during twelve consecutive months.
Bottom line
- Howey identifies investment contracts through money invested in a common enterprise with expected profits from others' efforts.
- Fixed annuities are excluded; variable annuities are securities outside the insurance-company exemption.
- Offers and sales require state registration, an exemption, or federal covered status.
- Coordination generally requires ten filing days, two full business days for pricing information, and no stop order or pending proceeding.
Exam shortcut
Start by identifying the object: product, transaction, issuer, representative, or regulatory order. An exclusion for one does not automatically protect the others. Circle the counting word. “Offerees” includes people who declined; “subscribers” tests commitments; “first sale in the state” starts the Rule 506 notice clock. Keep separate clocks separate. Extra filing days cannot replace missing pricing days, and a timing waiver cannot erase a stop order.
The full lesson (about 4,309 words, 29 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- D23
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