Colorado Securities Act-twenty Years Later
| Publication year | 2011 |
| Pages | 31 |
2011, December, Pg. 31. Colorado Securities Act-Twenty Years Later
December 2011
Vol. 40, No. 12 [Page31]
Business Law articles are sponsored by the CBA Business Law Section to apprise members of current substantive law. Articles focus on business law topics for the Colorado practitioner, including antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, and securities law.
Coordinating Editors
Trygve E. Kjellsen of Lathrop and Gage LLP, Denver-(720) 931-3145, tkjellsen@lathropgage.com; David P. Steigerwald of Sparks Willson Borges Brandt and Johnson, P.C., Colorado Springs-(719) 475-0097, dpsteig@sparkswillson.com; Curt Todd, Denver-(303) 955-1184, ctodd@templelaw.comcastbiz.net
About the Authors
This article examines how the courts have treated the expanded provisions of the Colorado Securities Act of 1990. Consistent with the legislative purpose underlying the 1990 Act, courts continue to broadly and liberally interpret the Act to ensure robust protection of investors and Colorado financial markets.
On July 1, 2010, the Colorado Securities Act of 1990 (Act) and the changes it ushered into the state securities regulatory scheme turned 20.(fn1) What began as a special committee of the Colorado Bar Association (CBA) charged with thoroughly reviewing the 1981 Act would lead to the enactment of comprehensive changes to Colorado's securities laws.(fn2) After a six-month review of the 1981 Act, the CBA special committee decided that significant and substantive changes were necessary.(fn3) Using the Revised Uniform Securities Act (RUSA) as a model, the special committee completely rewrote the 1981 Act. Although much of the old Act remained, many new provisions were included.(fn4)
The CBA proposed Act would make revisions to nearly every provision of the 1981 Act, from registration and licensing requirements to exemptions and criminal and civil liability.(fn5) On enactment, the 1990 Act was met with largely positive feedback focusing on the need for the new legislation to better protect investors while simultaneously encouraging a robust and fertile environment for economic growth.(fn6)
Although the scope of the changes in the 1990 Act was historic, the effect of the legislative amendments most often has been felt in the courtroom. Understanding how the courts have treated the expanded provisions of the Act is crucial to practicing in the field of securities. This article examines the 1990 Act and discusses how Colorado courts have interpreted it. This article is intended to convey practical considerations practitioners should keep in mind when reviewing potential securities issues.
Defining a Security
The purposes of the 1990 Act and the 1981 Act(fn7) are identical: "to protect investors and maintain public confidence in securities markets while avoiding unreasonable burdens on participants in capital markets."(fn8) The Act specifies that its provisions should be broadly construed and interpreted liberally to bring about the Act's purpose.(fn9) Colorado courts have focused on the purpose of the Act as they have taken on the task of defining a security within the parameters of the statute.(fn10) With this broad interpretive mandate in mind, Colorado courts have not hesitated to interpret the Act consistent with its statutory aims.(fn11) In the last twenty years, Colorado courts have broadened the concept of a security with regard to investment contracts, viatical settlement investments, and joint venture interest as securities.
Modifying Federal Holdings
on Investment Contract Analysis
Colorado investment contract analysis originates from the U.S. Supreme Court decision SEC v. W.J. Howey Co.(fn12) Colorado courts have consistently acknowledged that that the Howey test is the proper test for investment contract analysis in Colorado.(fn13) Accordingly, the test for an investment contract remains:
1) a contract, transaction, or scheme whereby a person invests his or her money;
2) in a common enterprise; and
3) is led to expect profits derived from the entrepreneurial or managerial efforts of others.(fn14)
In adopting the Howey test, Colorado courts embraced a more flexible barometer to meet the "countless and variable schemes devised by those who seek the use of the money of others on the promise of profits"-one that could be adapted over time.(fn15)
The Colorado Court of Appeals in Joseph v. Viatica Management, LLC was presented with the issue of whether investor's interests in the Viatica Fund, which then used the funds to purchase viatical settlements, were considered investment contracts.(fn16) Viatical settlements and, broadly, life settlements, are life insurance policies purchased from terminally ill patients.(fn17) Investors bet that the insured will die sooner rather than later so that they can realize the death benefits in exchange for a discounted payment to the terminally ill patients.(fn18)
The court did two things. First, although it recognized that the provisions of the Act shall be coordinated with federal acts and statutes to the extent consistent with the purposes of the Act,(fn19) it declined to follow the DC Circuit Court's opinion in SEC v. Life Partners, Inc.,(fn20) which held that viatical settlements were not investment contracts.(fn21) The Viatica court distinguished Life Partners by pointing to the prophylactic and remedial purposes of the Act and its duty to interpret the Act broadly.(fn22) The court also held that the interests purchased by investors in the Viatica Fund constitute investment contracts under the rationale in Howey.(fn23) This decision was issued on August 1, 2002.
In 2005, the Colorado Legislature codified the Viatica decision by amending the definition of a security in the Act.(fn24) Senator Owens, who sponsored the bill, articulated a need for regulating the secondary market of life settlements or viaticals.(fn25) Many who opposed the legislation felt the bill did not go far enough in protecting investors from fraud.(fn26) They expressed fears that the bill was inadequate with regard to disclosure requirements and claimed that the bill failed to require brokers dealing in viaticals to pass a licensing test.(fn27) However, by defining viatical settlements as securities, legislators provided consumers the full and fair disclosure protections of the Act when purchasing viatical or life settlements.
Partnership Interests as Investment Contracts
Colorado appellate courts have consistently held that in applying the Howey test, the analysis of the transaction does not depend on the name or form of the instruments, but on the substantive economic realities underlying the transaction.(fn28) In Feigin v. Digital Interactive Associates, the court determined that the securities commissioner's search warrant affidavit was sufficient to state probable cause that the general partnership interests being sold constituted investment contracts.(fn29) In reaching this conclusion, the court rejected the analysis in Banghart,(fn30) a Tenth Circuit case applying the Howey test. There, the court held that the inquiry into whether partnership interests were securities was limited to whether management powers were reserved in the partnership agreement, not whether the general partners actually exercised those powers.(fn31)
Instead, the court looked to the analysis...
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