Chapter 4

DEFINITION OF SECURITY

The most prudent and practical position for entrepreneurs and corporate attorneys to take is that which considers any type of capital raising instrument, be it equity, debt or otherwise, a security.

In virtually all instances, corporate financing instruments offered and sold to investors constitute securities.[1] These include traditional items such as common stock, preferred stock and bonds, as well as debentures, notes, certificates of indebtedness, options, warrants, puts, calls, delayed delivery contracts and various investment contracts.[2]

However, despite this broad and oversimplified approach, it is important for the business executive and his or her advisers, including legal, accounting and investment advisers, to understand what constitutes a security, and the necessary elements which can cause an instrument to become classified as such.[3] The reason for the importance of this understanding is due to the fact that a commercial transaction between corporations and various other business entities, including general partnerships, joint ventures, limited partnerships or partnerships in commendam, usually involve securities.[4] This often comes as a surprise to corporate executives who have participated in many such deals over the years without ever considering the transactions as having involved securities.

SECTION 2(1) OF THE SECURITIES ACT OF 1933, 15 U.S.C. § 77b(1) (1988)

SECTION 3(a)(10) OF THE SECURITIES EXCHANGE ACT OF 1934, 15 U.S.C. § 78c(a)(10) (1988)

Section 297(a) of the Federal Securities Code[5] proposes to keep the broad definition of a security as now contained in the Securities Act of 1933 and the Securities Exchange Act of 1934.

Investment banking firms often assist a corporation in structuring and even creating securities for an offering in the current securities markets, including various derivative instruments.[6] The last two decades have witnessed a substantial increase in the offering of many different securities products by investment banking firms due to the transfer of assets to pools and the subsequent sale of participations to investors.[7] The corporate clients of the investment banking firms are constantly in need of additional capital.[8] Many of these corporations own various assets, such as loans, which are transferred to pools and then sold as securities to investors.[9] This process of creating pools of assets for sale to investors, often called securitization, has resulted in making large amounts of capital available to many corporations.[10]

SEC v. W.J. HOWEY CO., 328 U.S. 293 (1946)

LANDRETH TIMBER CO. v. LANDRETH, 471 U.S. 681 (1985)

REVES v. ERNST & YOUNG, 494 U.S. 56 (1990)

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[1] See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 165 (2d ed. 1988); see, e.g., Marine Bank v. Weaver, 455 U.S. 551 (1982); International Bhd. of Teamsters v. Daniel, 439 U.S. 551 (1979); United Hous. Found., Inc. v. Forman, 421 U.S. 837 (1975); Holden v. Hagopian, 978 F.2d 1115 (9th Cir. 1992); Banco Espanol de Credito v. Security Pacific National Bank, 973 F.2d 51 (2d Cir. 1992); SEC v. International Loan Network, Inc., 968 F.2d 1304 (D.C. Cir. 1992); Koch v. Hankins, 928 F.2d 1471 (9th Cir. 1991); Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), cert. denied, 454 U.S. 897 (1981); SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974); SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476 (9th Cir.), cert. denied, 414 U.S. 821 (1973).

[2] See 2 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 869‑1083 (3d ed. 1989); Michael E. Godwin, The New Look of Municipal Bonds, 68 A.B.A. J. 1580 (1982); Roberta S. Karmel, When Is Partnership Interest or Note a Security, N.Y. L.J., Feb. 18, 1993, at 3; Clyde Mitchell, Certificates of Deposit: Securities at Times, N.Y. L.J., Nov. 29, 1985, at 1. See generally Roberta S. Karmel, Do the Capital Markets Need So Many Regulators?, N.Y. L.J., Oct. 18, 1990, at 3.

[3] See RICHARD W. JENNINGS & HAROLD MARSH, JR., SECURITIES REGULATION 220‑22 (6th ed. 1987).

[4] See DAVID L. RATNER, SECURITIES REGULATION 229‑30 (3d ed. 1986). See generally Suzanna Andrews, The Hollywood Deal Game, Institutional Inv., Nov. 1991, at 69; Martin Mayer, Elliot Gould As "The Entrepreneur", Fortune, Oct. 1970, at 109.

[5] FEDERAL SECURITIES CODE § 297(a) (1980).

[6] See CHARLES R. GEISST, WALL STREET: A HISTORY 345-364 (1997); see also FRANK PARTNOY, F.I.A.S.C.O. 48-61 (1997); JAMES D. COX, ROBERT W. HILLMAN & DONALD C. LANGEVOORT, SECURITIES REGULATION 134-139 (1991).

[7] See JOHN BROOKS, THE TAKEOVER GAME 14‑18 (1987); 1 TAMAR FRANKEL, SECURITIZATION §1.2, at 6-7 (1991); Charles J. Johnson, Jr. & Michael L. Schler, Zero‑Coupon Bonds, in SIXTEENTH ANNUAL INSTITUTE ON SECURITIES REGULATION 53, 53‑60 (Stephen J. Friedman, Charles M. Nathan, Harvey L. Pitt & Roland J. Santoni eds., 1985); Alvin C. Warren, Jr., Comment, Financial Contract Innovation and Income Tax Policy, 107 Harv. L. Rev. 460, 460-61 & n.2 (1993); Laura Jereski, Alice in Mortgageland, Forbes, Mar. 1, 1993, at 46; Laura Jereski, Mortgage Derivatives Claim Victims Big and Small, Wall St. J., Apr. 20, 1994, at C1; Jonathan R. Laing, The Next Meltdown?, Barron's, June 7, 1993, at 10; Susan Lee, What's With the Casino Society?, Forbes, Sept. 22, 1986, at 150; Robert Lenzer & William Heuslein, The Age of Digital Capitalism, Forbes, Mar. 29, 1993, at 62; Dana W. Linden, Wall Street R&D, Forbes, Oct. 12, 1993, at 112.

[8] See VICTOR BRUDNEY & MARVIN A. CHIRELSTEIN, CORPORATE FINANCE 133‑35 (3d ed. 1987); MARTIN MAYER, MARKETS 226‑29 (1988).

[9] See PAUL FERRIS, THE MASTER BANKERS 123 (1984); MICHAEL LEWIS, LIAR'S POKER 136‑39 (1989).

[10] See RON CHERNOW, THE HOUSE OF MORGAN 656 (1990); 1 TAMAR FRANKEL, SECURITIZATION §6.3, at 185-87 & nn.1-2 (1991); ADAM SMITH, THE ROARING EIGHTIES 19 (1988); Rodney S. Dayan & Richard T. Pratt, Mortgage‑Related Securities, in SIXTEENTH ANNUAL INSTITUTE ON SECURITIES REGULATION 63, 64‑72 (Stephen J. Friedman, Charles M. Nathan, Harvey L. Pitt & Roland J. Santoni eds., 1985); Simon Brady, The Year of the Asset‑Backed Eurobond, Euromoney, Feb. 1990, at 18; Hilary Rosenberg, The Unsinkable Junk Bond, Institutional Inv., Jan. 1989, at 43.