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What is a Security?

In general terms, a security is defined by statute and can be an agreement or contract between an investor (an individual, a group, or an institution) and an issuer (a corporation or a governmental entity). Issuers create and issue securities or debt in order to raise money to finance their operations. Common types of securities include stocks, bonds, promissory notes, certificates of interest, and participations in an oil, gas, or mining title or lease or in payments out of production under such a title or lease, although what is or is not a security often requires a complex analysis of all the facts and circumstances of a given situation. Other common securities are investment contracts and ownership interest in various entities.

A security may exist even if there is no written document.

The term “security” or “securities” shall include any limited partner interest in a limited partnership, share, stock, treasury stock, stock certificate under a voting trust agreement, collateral trust certificate, equipment trust certificate, preorganization certificate or receipt, subscription or reorganization certificate, note, bond, debenture, mortgage certificate or other evidence of indebtedness, any form of commercial paper, certificate in or under a profit sharing or participation agreement, certificate or any instrument representing any interest in or under an oil, gas or mining lease, fee or title, or any certificate or instrument representing or secured by an interest in any or all of the capital, property, assets, profits or earnings of any company, investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not.

The term applies regardless of whether the “security” or “securities” are evidenced by a written instrument. Provided, however, that this definition shall not apply to any insurance policy, endowment policy, annuity contract, optional annuity contract, or any contract or agreement in relation to and in consequence of any such policy or contract, issued by an insurance company subject to the supervision or control of the Texas Department of Insurance when the form of such policy or contract has been duly filed with the Department as now or hereafter required by law.

The Texas Securities Board has set for the following instruction on its website:

“In recent years licensed insurance agents nationwide have been recruited by promoters of illegal schemes to sell unregistered investment products to the public in Texas and elsewhere. These products have included promissory notes issued or guaranteed by offshore entities, brokered certificates of deposit, contracts for the sale and leaseback of telephone and ATM equipment, and resort “timeshare” investments. Typically these schemes have been directed at senior citizens.

As a result, criminal and civil enforcement actions have been taken by state and federal regulators against those who have sold these products. In Texas such actions have included criminal prosecution of agents licensed or formerly licensed with the Texas Department of Insurance.

As under the federal securities law, the Texas Securities Act defines the term “security” broadly to encompass virtually any instrument that might be sold as an investment. The law requires that securities and persons offering securities for sale in Texas must be registered with the Securities Commissioner unless a specific exemption from registration applies. It is a third degree felony for a person to violate a registration requirement.”