§ 3.2

• Jurisdiction: Arizona

§ 3.2 Partnership and Joint-Venture Interests

Generally, limited-partnership interests are considered securities under the investment-contract analysis since limited partners are not entitled to participate in the management of the partnership.⁴²⁴ In contrast, courts usually find that true general partnerships are not securities since general partners retain more than a nominal interest in the management of their ventures.⁴²⁵ But to repeat a recurring theme, form alone is not conclusive.⁴²⁶

To decide whether a general partnership or joint venture is a security, the Ninth Circuit applies Howey and refines the fourth element ("through the efforts of others") with an analysis outlined in the Fifth Circuit's opinion in Williamson v. Tucker.⁴²⁷ In Williamson, the Fifth Circuit held that the "efforts-of-others" element is met where:

 an agreement exists among the parties that leaves investors with so little power that the arrangement in fact distributes power like a limited partnership;

? the investors are so inexperienced and unknowledgeable in business affairs that they are incapable of intelligently exercising their partnership powers; or

? the investors are so dependent on some unique entrepreneurial or managerial ability such that the investors cannot replace the manager or otherwise exercise meaningful partnership powers.⁴²⁸

The list is not exhaustive; other factors could give rise to such dependence on the promoter or manager that the exercise of partnership powers is effectively impossible.⁴²⁹

In Nutek Information Systems,⁴³⁰ a 1998 decision, the Arizona Court of Appeals adopted the Williamson test. But it chose a slightly different path than the Ninth Circuit. In Holden, the Ninth Circuit stated that the proper inquiry is whether the investors are experienced and knowledgeable in business affairs "generally, not whether they are experienced and sophisticated in the particular industry or area in which the partnership engages and they have invested."⁴³¹ The Arizona Court of Appeals declined to follow Holden and adopted the Fifth Circuit's interpretation in Williamson.⁴³² Williamson "requires that the investors' knowledge and experience be evaluated with reference to the nature of the underlying venture. . . . [A]ny holding to the contrary would be inconsistent with Howey itself."⁴³³ The Nutek court also found that Arizona courts implicitly adopted this logic in Daggett⁴³⁴ (where the plaintiff had no experience in the marketing of free art) and Sulliv...