Security (Uniform Securities Act Definition)

Ravenscourt Links sells 400 memberships at $35,000 each. A membership entitles the holder to play the golf course, use the clubhouse and dining room, and vote for the board. It pays no dividend, carries no claim on the club's earnings or assets, and cannot be resold at a profit because the club buys any surrendered membership back at the original $35,000 with no adjustment. The club's marketing stresses the quality of the greens and the waiting list. Under the Uniform Securities Act, is a Ravenscourt membership a security?

1. A.Yes, because members vote for the board, which gives them an equity interest in the club.Governance rights are not profit rights. Voting alone does not create the expectation of profit an investment contract requires.
2. B.Yes, because $35,000 is an investment of money in a common enterprise operated by the club's management.Investment of money and common enterprise are only two elements. The expectation of profits from the efforts of others is absent.
3. C.No, because the Act excludes any interest sold by a not-for-profit recreational organisation.There is no such exclusion, and the stem never says the club is not-for-profit. The membership fails on the profit element, not on the seller's status.
4. D.No, because the buyer purchases the use of a facility and has no expectation of profit from the efforts of others.Correct. No dividend, no claim on earnings and a fixed-price buyback together eliminate the profit expectation, so the membership is a consumption interest.

Why: An investment contract requires an investment of money in a common enterprise with an EXPECTATION OF PROFITS derived from the efforts of others. The profit element is missing here and missing by design. A member pays $35,000 to consume something: golf, meals and a vote on club governance. There is no dividend, no share of earnings, no claim on assets, and the fixed-price buyback removes any prospect of capital appreciation. What the buyer is purchasing is the use of a facility, not a return on capital, so the membership is not a security. Had the club instead promised members a share of its operating profits or a resale price tied to the club's value, the analysis would change.

Wendell Prowse does two things at his federally insured commercial bank on the same morning. He opens an ordinary interest-bearing savings account and deposits $40,000. He then buys $25,000 of subordinated notes issued by the bank itself to raise capital. Under the Uniform Securities Act:

1. A.both the savings deposit and the subordinated notes are exempt securitiesA savings deposit is not a security at all, so it is not an exempt security either.
2. B.the savings deposit is not a security, while the subordinated notes are a security that is exempt because it was issued by a bankCorrect. A deposit falls outside the definition; a bank-issued note is a security and qualifies as an exempt security.
3. C.neither is a security, because instruments issued by federally insured banks are outside the ActSecurities issued by banks are within the definition; they are exempt from registration, which is a different thing.
4. D.both are securities, but only the savings deposit is exempt because it is federally insuredFederal deposit insurance does not make a deposit a security, and it is the note that is the exempt security here.

Why: A bank deposit is not a security. The depositor is a creditor of an insured institution in a transaction the banking laws govern, and there is no investment contract or listed instrument involved. A note issued by the bank to raise capital is different: it is a security, and it is one the Act separately treats as an EXEMPT SECURITY because it was issued by a bank. The distinction matters because exempt status removes the registration requirement but leaves the antifraud provisions fully in force, whereas something that is not a security at all is outside the Act entirely.

Isolde Kerrigan holds four positions and asks her agent which of them the Uniform Securities Act treats as a security. Position 1 is an exchange-listed put on 100 shares of an industrial company. Position 2 is a call option on a March wheat futures contract. Position 3 is a call option on a broad published index of common stocks. Position 4 is an option on 5,000 bushels of physical corn for delivery to a grain elevator. Which of the four are securities under the Act?

1. A.Positions 1 and 4 only, because both settle by delivery of the underlying item.Settlement mechanics are not the test. Position 4 is an option on physical corn, a commodity, and is outside the definition.
2. B.All four, because every option and privilege is enumerated in the definition of a security.The enumeration is qualified. Only options on a security, a certificate of deposit, or a group or index of securities are included.
3. C.Positions 1 and 3 only, because each is an option on a security or on an index of securities.Correct. An option follows its underlying, so the stock option and the securities-index option are securities and the two commodity options are not.
4. D.Position 1 only, because an option on an index is a cash-settled wager rather than an option on a security.Options on a group or index of securities are expressly named in the definition, whether or not they settle in cash.

Why: The Uniform Securities Act expressly enumerates puts, calls, straddles, options and privileges ON A SECURITY, on a certificate of deposit, or on a group or index of securities. Position 1 is an option on common stock and Position 3 is an option on an index of securities, so both are squarely inside the definition. Positions 2 and 4 are options on commodities, one on a futures contract and one on physical corn. The underlying is a commodity rather than a security, and commodity options and futures are regulated under the commodity laws, not the state securities acts. The rule to hold onto is that the option follows its underlying: an option on a security is a security, an option on a commodity is not.

Two instruments reach an agent at Falconridge Securities. The first is a temporary certificate issued by Ardnavore Mills to subscribers while the definitive engraved certificates are being printed; it evidences the same shares and will be exchanged for them. The second is a depositary receipt evidencing shares of a foreign issuer deposited with a bank. Under the Uniform Securities Act, these instruments are:

1. A.neither a security, because each is merely evidence of ownership rather than an investment instrument in its own rightThe definition expressly reaches instruments that evidence or represent a security.
2. B.the temporary certificate only, because a depositary receipt represents securities of a foreign issuer outside the Act's reachA receipt for a deposited security is itself a security, and foreign issuance does not remove it from the definition.
3. C.the depositary receipt only, because a temporary certificate has no independent value once the definitive certificates are issuedA temporary or interim certificate for a security is expressly within the definition.
4. D.both securities, because the definition expressly includes a temporary or interim certificate for, and a receipt for, any listed instrumentCorrect. The definition captures temporary and interim certificates and receipts for securities.

Why: The definition of a security does not stop at the underlying instrument. It expressly extends to any certificate of interest or participation in, TEMPORARY OR INTERIM CERTIFICATE FOR, RECEIPT FOR, guarantee of, or warrant or right to subscribe to or purchase, any of the listed instruments. A temporary certificate for shares is a security because the shares are; a receipt for deposited shares is a security for the same reason. The drafting is deliberate: it prevents anyone from escaping the Act by wrapping a security in a piece of paper that is not itself the security.