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Definition of Security. Statutory definition “Howey” test Real estate / business interests. Last updated 13 Feb 12. Implications of drawing line. Securities industry demographics (Feb 2009). Public companies: 12,000 (securities registered with SEC) 4,000 operating companies
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Definition of Security Statutory definition “Howey” test Real estate / business interests Last updated 13 Feb 12
Securities industry demographics(Feb 2009) Public companies: • 12,000 (securities registered with SEC) • 4,000 operating companies Investment advisers: • 11,300 (includes hedge fund managers) • up from 7,546 in 2002) Broker-dealers: • 5,500 (including 173,000 branch offices, up from 75,000 in 2001) • 665,000 registered representatives Mutual funds: • 950 families/complexes • 4,600 registered funds Stock exchanges • Eleven exchanges Clearing agencies • Five Nationally recognized statistical rating organizations • Ten Outstanding asset-backed securities • $2.5 trillion (in 2007) • up from $1 trillion in 2000 • Today worth ..
Statutory definition Securities Act § 2 Definitions When used in this subchapter, unless the context otherwise requires-- (1) The term "security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Statutory definition “Catch all” • evidence of indebtedness • certificate of interest or participation in any profit-sharing agreement • transferable share • investment contract • certificate of deposit for a security • interest or instrument commonly known as a "security" • certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Enumerated • note • stock • treasury stock • bond • debenture • collateral-trust certificate • preorganization certificate or subscription • voting-trust certificate • fractional undivided interest in oil, gas, or other mineral rights • any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof) • any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency,
“Howey test” … an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby [1] a person invests his money [2] in a common enterprise and [3] is led to expect profits [4] solely from the efforts of the promoter or a third party,
Real estate - security? A - Beachfront Resorts offers buyers "rooms" in a beachfront hotel. All rents from hotel rooms are pooled, and each buyer receives a pro rata net rentals for her room. Buyers cannot occupy their rooms, except for 2 designated weeks each year. Beachfront Resorts emphasizes that rent will cover P&I. B - Dubois is a real estate agent who offers Hawaiian condos. To sell condos, Dubois recommends that buyers consider a management contract with Hotel Corp-Pacific -- condo management and rent collection services. Dubois gets no compensation from HCP, and not all buyers use HCP. Under HCP's rent pooling agreement, rents from various condos are pooled; buyers can occupy for only 2 weeks/year. Dubois tells buyers rent pooling will pay P&I. C - Fox Hills Golf Villas offers "weeks" at its golf complex condos. Buyers can use their week of occupancy in two ways: (1) rent their condo (on their own or through Fox Hills) and receive a rental payment, or (2) occupy the condo themselves. Fox Hills emphasizes that buyers who choose to rent will be able to cover P&I. D - Disney World Opportunities ("Dwops") offers residential lots in a resort community near Disney World. Dwops requires buyers to pay "dues" for a Dwops-operated country club and other community facilities, such as a club house, gardens, swimming pool, tennis courts, and water treatment. Dwops emphasizes to investors the potential appreciation of the lots.
Business interests - security? A - Albert and Amanda invest in an S-corporation that they formed under the New Columbia BCA. Albert and Amanda are the only shareholders, and they enter into a shareholders' agreement in which they do away with the board of directors and agree to co-manage the business. Albert and Amanda are both sharp cookies. B - Bif and Barbie invest as limited partners in a limited partnership that acquires houses for investment. General partner, Goodacre Investments, is charged under the limited partnership agreement to develop, lease and sell the properties. Under the agreement, Bif and Barbie retain authority to approve the purchase and develop new properties, and to remove Goodacre. Bif and Barbie are who they are. C - Carl and Carol are 2 of 23 investors who invest in Rivanna Trawlers Unlimited, a general partnership. RTU buys fishing boats and hires an outside management company. Things go poorly and the partners get rid of the management company. They then sue the management company for fraud – under the federal securities laws. D - Daniella, an associate with GMPK LLC, an international accounting firm, is excited when she learns she will be made “member“ of the firm. She is told that she will have to invest $20,000. She is also told it would be unseemly for her to ask any questions about the firms’ operating agreement, even though "due diligence" is a regular part of her practice. When Daniella becomes a member, she learns that the firm faces an SEC investigation for its work on Exron. She had no idea.
Williamson v. Tucker (5th Cir. 1981) [A]n investor who claims his general partnership or joint venture interest is an investment contract has a difficult burden to overcome.... Such an investor must demonstrate that, in spite of the partnership form which the investment took, he was so dependent on the promoter or on a third party that he was in fact unable to exercises meaningful partnership powers. ... A general partnership or joint venture interest can be designated a security if the investor can establish ... that • (1) an 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; or • (2) the partner or venturer is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers; or • (3) the partner or venture is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers.
