The Definition of 'Security' Under the Federal Securities Laws

Definitions are essential in any regulatory regime and federal securities regulation is no exception. The most fundamental definition under federal and state securities regulation is for the term “security.” The application of multiple statutes, hundreds of administrative rules, and countless cases and interpretations, turns on this definition. This book chapter provides a brief overview of the definition of “security.” The goal is to provide a survey of the law, introduce key themes, and raise several controversial topics to give the reader a flavor for the debates that arise over the definition. Several themes emerge. First, the definition of “security” exemplifies the broader tension regarding the scope of federal securities regulation. Second, the definition dynamic, and lawyers, regulators, and courts often look to the definition of “security” to determine whether a newly minted investment scheme will be covered. Third, new products and services call for a careful review of the definition of “security” to determine whether it should be modified or adapted. The Chapter begins with the statutory definition of “security” and the definition of “investment contract,” a term included in the definition. It then discusses interests in various business organizations, such as corporations and partnerships. It then moves to a discussion of notes, derivative instruments, insurance products, and bank products, each presenting different problems. The Chapter then contains a short discussion of the state law definition of security primarily as a point of contrast with the federal definition. It concludes with emergent themes to keep in mind when analyzing whether a security exists.