Chapter 2 - § 2.9 • EXAMPLES OF INSTRUMENTS FOUND TO BE "SECURITIES"

• Jurisdiction: Colorado

§ 2.9 • EXAMPLES OF INSTRUMENTS FOUND TO BE "SECURITIES"

Under the "investment contract" analysis of the Howey case, courts have held many things to be securities that might not otherwise seem to be securities. As in the Howey case itself, a plot of land with five orange trees being sold by a promoter who also offers a management contract whereunder the promoter will also pick the oranges and sell them for the benefit of the investors was found to be a security.

The U.S. District Court for the Southern District of West Virginia found a pyramid scheme not to be a security.⁸⁹ A rural church found itself with $200,000 to invest and it purchased gold coins from a promoter, "Sell America." The promoter promised the church that it would be able to sell new packages of coins to new investors, earning commissions as it did. The coins' prices were greatly inflated, both when purchased by the church and when sold to the ultimate investor.

The court found vertical commonality between the promoter and the church, but did not find horizontal commonality that it felt was necessary, stating "a common enterprise exists only when the transaction contemplates a multiplicity of investors contemporaneously holding equipotential interests in the enterprise."⁹⁰ The court also held that the profits anticipated by the church were not going to be solely from the efforts of the promoter. The court found that each investor had a significant role in earning his or her own return by reselling the coins to further investors.⁹¹ The court concluded that there may have been fraud involved, but not securities fraud.

In SEC v. Friendly Power Co. LLC,⁹² the court found that a promoter who sold electric power franchises was selling securities where the investments, although structured as partnerships, gave the investor-partners no real control over the success of the enterprise, and the investor-partners at best performed merely ministerial functions.

In State v. Tyler,⁹³ soliciting political contributions was found to require registration under the Iowa securities act. Tyler had received a cordless telephone as a Father's Day gift, then proceeded to use the gift in the commission of first-degree theft. The state intercepted the conversations, and Tyler was convicted in Scott County and served 90 days before being released on probation. Tyler sued Scott County in federal court for the monitoring of his cordless telephone, but the court granted Scott County summary judgment, holding that the intercepted conversations (between the handset and the base) were not "wire communication" within the meaning of the federal wiretap law. Tyler then started lobbying Congress to change the wiretap law and sought political contributions through his personal PAC, promising contributors that if his lobbying change and ultimate lawsuit were successful, he would share the proceeds with them. He was indicted, and the Iowa courts found him guilty of two counts of securities fraud; the Iowa Supreme Court had little trouble finding an investment contract.

Eurobond offerings have been held to constitute the offer and sale of securities. In SEC v. Eurobond Exchange Ltd.,⁹⁴ the promoter was selling in the United States interest-bearing treasury bonds issued by foreign governments, purchased in large part with foreign currency loans. The...