Securities 101

What is a security?

A security is an investment, generally of an intangible nature, which has certain characteristics. Legislatures and courts have generally identified what will be called a security through the concept of an “investment contract.” The four requirements for an investment contract are that it:

1) is an investment of money; 
2) in a common enterprise;
3) with the expectation of profit; 
4) through the effort of another.

Commonly known securities are stocks, bonds, promissory notes, debentures, and interests in gas, oil, mineral rights, but there are many other types as well.

Why are securities regulated?

Since securities are intangibles that have no intrinsic value aside from the value of the business or assets in which they represent an interest, security cannot be examined physically as can many goods purchased by consumers. An intelligent judgment of the value of a security requires information about the issuer. The fundamental premise of both federal and state regulation of securities is that investors need protection in the purchase of such unique goods.

State securities laws grew out of the many instances in the early 20th century where unsophisticated, “retail” investors were swindled out of their savings by sellers of worthless or fraudulent securities. Due to their nature, securities laws now require that investors be made aware of any facts of material importance surrounding the security in question. An easy way to think of what these facts maybe is to imagine what might be important to you in deciding whether or not to buy a security. For example, does the issuer actually exist, and do they hold a license? Who are the officers or managers of the securities or firm? Are they experienced and of good reputation? Has the issuer ever had any past disciplinary problems? What are the terms of the securities being offered? Securities laws require that answers to these and other concerns be available to potential investors. Think of it as a “seller beware” mentality instead of the reverse.

You can read the Colorado Securities Act by clicking here.

What is regulated?

Securities laws generally regulate all aspects of the securities business. All securities laws regulate both the investment that is being sold and the person doing the selling or advising. Certain securities and transactions are exempt from some aspects of this regulation based on assumptions that the nature of such securities and transactions does not warrant full regulation.

  • The investment: The regulation of the investment is done by requiring that the investment be either registered or exempt from registration. Each state has its own laws governing what constitutes an exemption, but an example of Colorado exempt offerings would be those listed on a national securities exchange, e.g. The New York Stock Exchange and the NASDAQ.  
  • The person: Securities laws require that the person selling securities and the firm employing that person be licensed to conduct that activity unless they fall within limited exemptions. These firms are referred to as “Broker-Dealers” and the individuals are commonly called “agents,” or “sales representatives.” Almost all states (including Colorado) require that any person or firm giving advice on the buying and selling of securities must also be licensed unless a limited exemption exists. These firms are called “Investment Advisers” and the individuals who work there are called “investment adviser representatives.”

You can learn more about who and what we regulate under the "For Firms and Industry Professionals" accordion drop down on our homepage. You can learn more about registering securities by and Individuals by clicking here

How is this regulation enforced?

Sometimes, either regulator will find suspicious activity among a licensee, or complaints from investors or fellow industry members may be reported. In that case, the state will initiate an investigation. If the result of the investigation merits an enforcement action, the state can carry out or initiate one. The tools of the state’s enforcement arsenal include administrative or civil actions and, in some cases, criminal actions. These actions may be taken against a licensee, an issuer, or anyone that has violated, or is believed to be about to violate, the securities laws. You can search and view the Colorado Division of Securities' enforcement activity under Enforcement Actions.