Chapter 2 - § 2.11 • GUIDELINES FOR WHAT IS NOT A "SECURITY

• Jurisdiction: Colorado

§ 2.11 • GUIDELINES FOR WHAT IS NOT A "SECURITY

The courts have also issued some guidelines for what is not a security, generally relying on the active participation of the plaintiff in the transaction to find he or she was not "relying on the efforts of others" or that he or she did not have an "investment motive." The principal method of avoiding classification as a security — and, therefore, avoiding the applicability of the 1933 Act — is to deal with industry-sophisticated investors who will have the ability and knowledge to supervise the management of the enterprise. For example:

• A real estate developer can enter into a joint venture with other real estate-sophisticated persons for the operation of an apartment building.
• An oil and gas company can enter into a drilling agreement seeking funds from other oil and gas professionals, and it may not be considered the sale of a security.

The staff of the Securities and Exchange Commission concluded that interests in a liquidating trust were not equity securities subject to registration under the 1934 Act. In the case of Wilmington Trust Co.,¹²⁸ the staff noted:

1) The beneficial interests in the liquidating trust were not transferable;
2) The beneficial interests were not represented by certificates;
3) The purpose of each of the liquidating trusts was specifically limited;
4) Each liquidating trust would terminate upon payment to the beneficial interest holders; and
5) The trustee would provide each beneficial interest holder with periodic reports and would file such reports on Forms 10-K and 8-K.

The Northern District of Texas found that joint venture interests were not securities in SEC v. Kinlaw Sec. Corp.,¹²⁹ where the joint venture agreements gave the venturers power (among other things) to remove the managing venturer upon a simple majority vote; where in contributing their funds to the ventures, the venturers represented expertise, experience, and financial capability; where the skills required for an oil and gas operator of the ventures in question were not unique or irreplaceable; and where the venturers actually did act in accordance with the venture agreement. The court found that, although the enterprises (the joint ventures) clearly were an investment of money in a common enterprise (the first two elements of the Howey test):

• The knowledge and ability the investors claimed to have;
• The rights given in the joint venture agreements; and
• The non-unique nature of the business of the ventures

failed the third prong of the Howey test (expectation of profits from the efforts of others) and, therefore, the venture interests were not securities.

In Klaers v. St. Peter,¹³⁰ the court found that the making of cash calls to a general partnership...