08/09/2013 07:04 pm ET Updated Oct 09, 2013

Are You Selling Securities?

After the stock market crash in 1929 the U.S. Congress regulated the sale of securities. Two famous statutes enacted in 1933 and 1934 require prior registration of securities offerings with the Securities and Exchange Commission and penalize fraud. The legal definition of "security" is much broader than stocks and bonds. A famous Supreme Court decision determined that fractional interests in orange groves were securities (SEC v. W.J. Howey & Co.). From that case comes the typical understanding that a security is an investment whose return to the investor is substantially dependent on the efforts of a third party.

A recent decision by the U.S. District Court for the Eastern District of Texas involved the solicitation of investments in Bitcoins (SEC v. Shavers). A Bitcoin is a privately created electronic currency not backed by a physical asset. Not surprisingly, the Court concluded that Bitcoin investments are subject to SEC regulation.

Many unusual investments are considered securities. For example, investing in the management of live beavers for breeding purposes was a security (Continental Marketing Corp. v. SEC). Of course, investments in petroleum and mineral exploration projects are frequently considered securities. A rule of thumb definition of a security involves considering how much involvement the investor has in managing the project. Nominal investor responsibilities are not sufficient to escape the definition. The SEC and the courts have consistently refused to apply a narrow and technical definition of the word "security."

As new business models and technologies develop, the old definition of security frequently attaches. It is best to seek legal and accounting advice before soliciting funds as significant civil and criminal penalties attach to securities law violations. The individual connecting potential investors to projects may also be required to personally register or obtain a license. Many middlemen not otherwise involved in management, promotion, or explaining the details of an investment have unwittingly violated state and federal securities laws. Consequently, are you selling securities?

Content concerning legal matters is for informational purposes only, and should not be relied upon in making legal decisions or assessing your legal risks. Always consult a licensed attorney in the appropriate jurisdiction before taking any course of action that may affect your legal rights.