Securities Regulation

1. Securities Regulation Definition of Security (last updated 31 Jan 13)

2. Clay Wheeler

3. 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.

4. 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,

5. SEC v. HJ Howey Co (US 1946)

6. “Howey test” Supreme Court: … an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.

7. “Howey test” Supreme Court: … 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,

8. Some hypotheticals …

9. Security? Shareholders Investors Investor Mgmt company FarmerJones corporation Trees Grove

10. Apply Howey test … investment contract … means [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,

11. Intl Bro. of Teamsters v. Daniel (US 1979)

12. Statutory definition Exchange Act § 3. Definitions and application (a) Definitions. When used in this chapter, unless the context otherwise requires-- (10) The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, 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 instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

13. Intl Bro. of Teamsters v. Daniel Supreme Court: “An employee who participates in a noncontributory, compulsory pension plan by definition makes no payment into the pension fund.” “The existence of this comprehensive legislation [ERISA] governing the use and terms of employee pension plans severely undercuts all arguments for extending he Securities Acts to noncontributory, compulsory pension plans.” Justice Lewis Powell

14. “Howey test (modified)” Supreme Court: investment contract … means [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, [5] not subject to comprehensive legislative scheme

15. Apply Howey test … investment contract … means [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, [5] not subject to comprehensive legislative scheme

16. Apply Howey …

19. Apply Howey

20. Apply Howey

21. Apply Howey

22. Apply Howey

23. Apply Howey

24. Apply Howey

25. Apply Howey

26. Apply Howey

27. Apply Howey

28. Apply Howey

29. Apply Howey

30. Apply Howey

31. Apply Howey

32. Apply Howey

33. Some hypotheticals … When are real estate investments “securities”?

34. Security?

35. More line-drawing … Business interests “Insurance proceeds” “Stock” “Notes”

36. Definition of “security” Business organizations • Corporate “stock” • “Sale of business” doctrine • Compare to sale of assets • Stock is stock • Partnership interests • Active partners • Passive partners • Williamson test • Hybrid entity interests (LP / LLP / LLC) • Rules of thumb • Changes over time Viatical settlement • Ministerial vs management • Disclose risk of AIDS cure

37. 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....   ... A general partnership or joint venture interest can be designated a security if the investor can establish ... that • 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 • 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 • 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.

40. Hypothetical?

41. More line-drawing … “Notes” Commercial vs. consumer Family resemblance test Relationship to – ’33 Act exemption ’34 Act exception

42. Federal securities laws

43. Federal securities laws U = All investments Securities Notes Subject to ’33 Act Subject to ’34 Act Not register “current tx” < 9 mos Not subject to ’34 Act – “note” < 9 mos Not subject to ’33 Act

44. Reves v. Ernst & Young (US 1990) Family resemblance test presume "note" = "security" Unless (1)  motivation of seller and buyer (2)  plan of distribution (3)  reasonable expectations of investing public (4)  other factors reduce risk (regulatory scheme) Members Co-op

45. Compare tests Investment contract (Howey & progeny) [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, [5] not subject to comprehensive legislative scheme Family resemblance test (Reves v. Ernst & Young) (1)  motivation of seller and buyer (2)  plan of distribution (3)  reasonable expectations of investing public (4)  other factors reduce risk (regulatory scheme)

46. Security?

47. The end