When most people hear the word “security,” they immediately think of stocks or bonds. But in the eyes of U.S. law, the term encompasses far more. The definition of a security—and the interpretation courts have given to it over time—determines whether an investment falls under the jurisdiction of federal securities regulators, especially the Securities and Exchange Commission (SEC). Understanding this concept is the foundation of any meaningful discussion about securities law.
The federal securities laws—the Securities Act of 1933 and the Securities Exchange Act of 1934—were designed to promote transparency, fairness, and trust in capital markets. These statutes hinge on one key question: Is the financial instrument in question a “security”?
If the answer is yes, then it triggers a cascade of regulatory requirements, including registration, disclosure, antifraud provisions, and oversight by the SEC and other regulators. If the answer is no, the transaction may fall outside these protections.
Section 2(a)(1) of the Securities Act of 1933 and Section 3(a)(10) of the 1934 Act provide nearly identical lists of what qualifies as a security:
“... any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, investment contract, … or, in general, any interest or instrument commonly known as a ‘security.’”
But this list, though lengthy, is not exhaustive. Congress deliberately used broad language to ensure the law could adapt to evolving financial innovations. The phrase “investment contract” has become a particularly flexible and important category—one that courts have applied to everything from orange groves to digital tokens.
Courts have long emphasized that the definition of a security depends on economic reality, not the labels parties use. This principle, famously articulated in SEC v. W.J. Howey Co. (1946), gave rise to the “Howey Test,” which assesses whether an arrangement involves an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others.
This flexible standard allows regulators to adapt to new financial products that may function like traditional securities even if they look different on the surface.
Today, the challenge of defining a security is more relevant than ever. Modern instruments—such as tokenized assets, NFTs, and decentralized finance (DeFi) offerings—often blur the line between commodities, securities, and entirely new asset classes.
The SEC has relied on the Howey Test and the principle of economic substance to argue that many crypto offerings qualify as securities, while industry participants often push back, advocating for a new regulatory framework tailored to digital innovation.
Legal clarity starts here. Partner with Zecca Ross Law Firm to transform complexity into opportunity.