Chapter 2 - § 2.8 • GENERAL PARTNERSHIP INTERESTS AND JOINT VENTURES

• Jurisdiction: Colorado

§ 2.8 • GENERAL PARTNERSHIP INTERESTS AND JOINT VENTURES

General partnership interests and joint venture interests (among other things) are not included among the items enumerated in the definition of the term "security" in the 1933 Act or the 1934 Act. Because of the control given general partners and joint venturers in the typical partnership or joint venture agreement, there is a strong presumption that these interests are not securities.⁷⁰ The party seeking to overcome this presumption bears the burden of proof, even when that party is the SEC.

Williamson v. Tucker⁷¹ is the seminal case in this area. In Williamson, the court held that the determination as to whether a general partnership was an investment contract — and therefore a security under Howey — is to be made on the basis of substance or economic reality, not form. In Williamson, the court held that an interest in a general partnership or a joint venture can be a security if the investor can establish one of three factors:

1) The agreement among the parties leaves so little power in the hands of the partner or venturer that the arrangement in fact distributes power as would a limited partnership;
2) The partner or venturer is so inexperienced and unknowledgeable in business affairs that he or she is incapable of exercising his or her partnership or venture powers; or⁷²
3) The partner or venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he or she cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers.

Applying Williamson and the Howey analysis, the Eleventh Circuit found interests in 28 Colorado limited liability partnerships⁷³ to be "investment contracts" where the participants were inexperienced with little ability to control the partnerships.⁷⁴ In that case, the court quoted Williamson,⁷⁵ stating:

A general partnership interest is presumed not to be an investment contract because a general partner typically takes an active part in managing the business and therefore does not rely solely on the efforts of others. But consistent with the substance over form principal of Howey, "[a] scheme which sells investments to inexperienced and unknowledgeable members of the general public cannot escape the reach of the securities laws merely by labeling itself a general partnership or joint venture." A general partnership interest may qualify as an investment contract if the general partner in fact retains little ability to control the profitability of the investment.

In another case, the Colorado Court of Appeals said that "the presumption that a general partnership interest is not a security, as set forth in Williamson v. Tucker . . . is not applicable to an LLP interest in Colorado."⁷⁶ The court held that the "relevant inquiry" was "to determine whether the investors expected profits from the managerial efforts — those essential efforts that affect the failure or success of the enterprise — of someone else, and whether the investors had substantial power to affect the success of the enterprise."⁷⁷ This is sometimes referred to as the "economic realities" test. Rather than being different from the Williamson test, the economic realities test is actually based on the Williamson test.⁷⁸

In Koch v. Hankins,⁷⁹ the Ninth Circuit found that general partnership interests in a jojoba cultivation project may be securities where the general partners were not expected to participate in the decision-making and may not have...