Investing 101 | Colorado Division of Securities

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 include stocks, bonds, and mutual funds. Examples include investing in a 401k, brokerage account, or investing in someone else’s business with the hopes of making money. Securities must be registered or exempt from registration. Full and fair disclosures are mandatory. Learn more about securities registration through The Division of Securities.

What is Cryptocurrency?

A cryptocurrency is a form of digital asset based on a network (often using blockchain technology) that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.

The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure.

The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.

Some cryptocurrencies are securities (but not all).

What is an NFT?

NFTs (non-fungible tokens) are unique cryptographic tokens that exist on a blockchain and cannot be replicated. Cryptographic means a secure communications technique that allows only the sender and intended recipient of a message to view its contents.

NFTs can represent real-world items like artwork and real estate.

"Tokenizing" these real-world tangible assets makes buying, selling, and trading them more efficient while reducing the probability of fraud.

An NFT can be a security.

Blockchain: a system in which a record of transactions of a cryptocurrency ( so buy or sell) is maintained across several computers that are linked in a peer-to-peer network.

What is an ETF?

Exchange Traded Funds (ETFs) are baskets of investments such as stocks, bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments that are created to mimic the performance of an underlying index or sector.

ETFs are often compared to mutual funds because they pool investors’ assets and use professional fund managers to invest the money according to a specific strategy detailed in the fund’s prospectus. Unlike a mutual fund, which is bought or sold directly from the fund issuer at the fund’s net asset value (NAV), which is set at the end of each trading day, an ETF is bought and sold on an exchange like any other listed stock at a price continuously determined on the exchange.

Initially, ETFs were purchased primarily by sophisticated investors, such as hedge fund
managers, who used the products to “hedge” against a particular risk. Today, retail investors with investment objectives of safety and stability are purchasing ETFs as an alternative to mutual funds and other investments.

More Information about Common and Non-traditional ETFs

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.

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

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.

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.”

Learn more about registering securities by and Individuals.

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.