What is a “Security”?
Under US federal securities laws, the definition of a “security” is derived from the “economic realities” test first espoused by the U.S. Supreme Court in 1946 in the case, SEC v. W.J. Howey Co., 328 U.S. 293. Under the Howey Test, an economic interest in a business will be classified as a security only if the following three elements are present:
- an investment of money has been made,
- in a common enterprise, and
- the investor has the expectation of profits, which profits are expected to arise solely, or substantially, from the efforts of the promoter or third party.
An important term that I use frequently is “issuer”. An “issuer” is the “person” who sells and issues its own securities. This is different from a business, like a broker-dealer, that buys and sells securities of other businesses. In the definition of “security” above, the issuer is the business that owns the “common enterprise”, and can be thought of as the “promoter or third party”.