Real Estate Interests as Securities
• Question arises under
– federal law and
– state law.
• Federal law: classically, mandates full disclosure. The
issuer of securities files a registration statement that
includes a prospectus designed to summarize the
offering for the public, particularly its risks.
– The traditional federal policy is merely one of disclosure.
• So long as you disclose the risk, even if it is very high risk, you
may then offer the securities for sale.
• State law: varies, but at the classic historic extreme,
required an offering to be “fair, just and equitable”
before it could take place within the state.
• Today, much of state law has been preempted by
federal law.
1
Donald J. Weidner
Real Estate Interests As Securities
• Federal and state statutory definitions of “security” tend
to parallel one or another
– even though the underlying policies of state and
federal law have in the past diverged significantly.
• Federal and state case law developments on what
constitutes a “security” inform one another
– but there are differences.
• Joiner Leasing and Howey are two major real estate
cases from the 1940s that indicate that interests in
leaseholds and in fees simple can be securities within
the meaning of the federal securities laws.
2
Donald J. Weidner
SEC v. C.M.Joiner Leasing Corp.
320 U.S. 344 (1943)
• Promoter acquired a lease on 4,700 acres of
potentially oil-bearing land.
• Promoter sold investors partial assignments of its
leasehold interest
– in parcels ranging from 2.5 to 20 acres.
• In addition, the Promoter also promised each investor
that he would explore for oil.
• When the SEC attempted to restrain the Promoter,
he asserted that he was only selling “mere” interests
in real estate, not securities.
– Securities are financial products like stocks and
bonds, he said, not direct interests in real
property.
3
Donald J. Weidner
Joiner Leasing (cont’d)
• Supreme Court held for the SEC: Promoter was selling
more than “naked leasehold rights,” he was also
trading in the economic inducements of the proposed
exploration well.
– The package arrangement, of the leasehold interest
coupled with the contract to explore, falls within the
concept of “investment contract.”
• Often-quoted language: “The reach of the Securities
Act does not stop with the obvious and commonplace.
Novel, uncommon or irregular devices are also
reached if . . . they were widely offered or dealt in
under terms or courses of dealings which established
their character in commerce as ‘investment contracts,’
or ‘as any interest or instrument commonly known as a
‘security.’”
4
Donald J. Weidner
SEC v. W.J.Howey Co.
328 U.S. 293 (1946).
• Promoter publicly offered for sale strips of Florida
citrus acreage;
– buyers received fees simple absolute by warranty
deeds.
• To avoid the Joiner Leasing problem, the Promoter
avoided mandatory service contracts.
• However, for an extra cost, investors could enter
optional service contracts under which
– the Promoter agreed to cultivate the acreage and
pay the net profits to the purchaser of the land.
• Most, but not all, of the purchasers of land also
purchased service contracts.
• As in Joiner Leasing, the Promoter argued that he
sold mere interests in real estate, not “securities.”
5
Donald J. Weidner
Howey (cont’d)
• Supreme Court was unmoved by the fact the service
contracts were optional.
– It said that individual development was unlikely
• Stating what is probably the most cited language in all
Securities law: An investment contract is a “scheme
whereby a person [1] 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.”
– A rule courts have been parsing for decades.
• Both Joiner Leasing and Howey seem to say: The
form of the investment unit, whether a stock
certificate or a warranty deed, is immaterial. The
question is whether, in substance, the unit is a
security.
– As in mortgage law, the question is substance over form
6
Donald J. Weidner
Solely Through the Efforts of Others
• HYPO: An investor contributes $x to become a
limited partner in a liquor store. The investor is
required to work in the store for several days during
each yearend holiday season.
• Does the limited partnership form of the investment
foreclose classification as a security?
– Not according to Howey
• Does the fact that the limited partner’s profits are not
solely through the efforts of others foreclose
classification as a security?
– Given the use of the word “solely” in Howey?
• Even state courts were quick to distance themselves
from the “solely” requirement
– If not “solely,” then what?
• Glenn Turner is a leading case
7
Donald J. Weidner
SEC v. Glenn W. Turner Enterprises, Inc. (on the
“efforts of others” prong of Howey)
474 F.2d 476 (9th Cir. 1973)
• Involved the sale of “self improvement” contracts by Dare
To Be Great, Inc.,
– a Florida Corporation that was a wholly-owned
subsidiary of Glenn W. Turner Enterprises, Inc.
• In short, purchasers acquired the right to take a selfimprovement course [ranging in price from $300 to
$5,000].
• The purchaser was required to exert great effort, attend
meetings and self-improve.
• Meetings were like revivals, much chanting, jubilation,
even “money humming.”
8
Donald J. Weidner
Glenn W. Turner Enterprises (cont’d)
• “Although mention of ‘money-humming’ is made at
several points in the record, we are not certain what this
activity entails, nor do we venture to guess.” 474 F.2d
at 479, n. 2.
• Purchaser can profit by selling courses to others.
• As to the “solely” test: “We adopt a more realistic test,
whether the efforts made by those other than the
investor are the undeniably significant ones, those
essential managerial efforts which affect the failure or
success of the enterprise.”
9
Donald J. Weidner
Silver Hills Country Club v. Sobieski (on
“profits” prong of Howey)
361 P.2d 906 (Cal. 1961).
• Promoter sold 110 “Charter Memberships” in a country
club for $150 each. The club was under construction and
expansion.
• Subsequent memberships were to be sold, and at higher
prices.
• The prices were expected to rise as additional facilities
(ex., a golf course) were constructed.
• Members had to pay monthly country club dues.
• Members could be expelled only for misbehavior or for
failure to pay dues.
• Membership was transferable, but only to persons
approved by the club’s Board of Directors.
• Members had no rights to the income or assets of the
club.
10
Donald J. Weidner
Silver Hills (cont’d)
• Because the promoters were to receive all the profit left over
from the construction and operation of the club facilities, the
purchasers were not getting and profit in the usual sense.
• Other jurisdictions had said “no security” because there was no
expectation of profit by the purchasers.
• However, the California court focused on the promoter raising
risk capital: “We have here nothing like the ordinary sale of a
right to use existing facilities. Petitioners are soliciting the risk
capital with which to develop a business for profit.”
– “Since the act does not make profit to the supplier of capital
[the offeree] the test of what is a security, it seems all the
more clear that its objective is to afford those who risk their
capital at least a fair chance of realizing their objectives in
legitimate ventures whether or not they expect a return on
their capital in one form or another.”
11
Donald J. Weidner
Brown v. Rairigh (on “common enterprise”
prong of Howey)
PR man has 15
(Supp. P. 101)
Pays $11,675 Cash on 2/74
10% interest in 5 horses

10% of all winnings
Agrees to shoulder 10% of all expenses
Option to purchase a further 25% interest in
same 5 horses based on value at 2/74
PR
horses (but is not in
business of promoting
and selling percentage
interests in race
horses. Only once
before had he sold an
interest in any of his
horses).
That is, equivalent to
a share, not of gross
receipts, but of
profits.
 Gets right to PUT the 10% interest back to
the PR man; the PUT is exercisable by 1/1/75
at a price = FMV at time of the exercise of the
PUT.
PR man retains
custody and control
of the 5 horses.
12
Donald J. Weidner
Brown v. Rairigh (cont’d)
‘s put expired.  claimed he was sold an unregistered
security and demands rescission under Florida’s “Blue
Sky” law.
Recall the now slightly modified basic definition of an
investment contract from Howey:
1) an investment of money
2) in a common enterprise
3) with an expectation of profits
4) solely (or primarily) through the essential managerial
efforts of a promoter or a third party.
Investment of money is clear here. Was there a “common
enterprise?”
13
Donald J. Weidner
Brown v. Rairigh (cont’d)
Brown v. Rairigh notes 3 different approaches to the “common
enterprise” requirement:
1. A one-on-one dealing between offeror and offeree is
sufficient.
2. It is sufficient if the transaction’s success depends on
multiple investors, even if there is no interaction among
those investors.
3. There must be both
a. more than one investor and
b. interaction between or among those investors.
14
Donald J. Weidner
Huberman v. Denny’s Restaurants, Inc. (on common
enterprise/efforts of others)
337 F.Supp. 1249 (N.D. Cal. 1972).
Operator Dev. agrees to build Dev.
Operator Conveys 20 year lease Dev.
Operator Agrees to pay rent:
Dev.
Fixed minimum + 5% of
monthly gross sales
Dev. sells fee Buyer
Assume Buyer discovers she has made a bad deal, but there
is no fraud or misrepresentation. May Buyer claim that she
purchased a security?
There was an investment of money.
Was there a common enterprise?
With profits to come solely through the efforts of others?
15
Donald J. Weidner
Huberman v. Denny’s Restaurant (cont’d)
• As to “common enterprise”:
– “Plaintiff as owner of the building and land not
only had the landlord’s natural interest in the
well being of her tenant but the significant
interest in the amount of additional ‘rent’ from
the lease that was dependent on the volume of
the restaurant sales. Therefore, since plaintiff
[buyer] and defendants [operator] had a
common interest in the success of the
venture, a ‘common enterprise’ has been
properly alleged for purposes of coming within
the Howey test.”
16
Donald J. Weidner
Huberman v. Denny’s Restaurant (cont’d)
• As to “solely through the efforts of others”:
– “She was not buying a franchise restaurant to
manage and defendants have not claimed that
plaintiff ever showed any intention of running the
franchise herself. She was looking solely to the
efforts of Denny’s and the other defendants for the
profits: First, in the guaranteed rental that they
had put in their lease, and second by the
successful running of the franchise which would
increase her ‘rental’ receipts with the increase in
sales.”
17
Donald J. Weidner
Brown v. Rairigh: First rationale for denying
recovery (no “common enterprise”)
• Brown rejected Huberman: “it goes too far because it
reduces the word ‘common’ to mere surplusage and
the word ‘enterprise’ is all that is left.”
• Should it make a difference if the racehorse
purchaser had purchased jointly with a friend or
spouse?
• In this case, is the victim the buyer or the seller?
– “There is no concomitant protection for
unsophisticated sellers who are persuaded to sell
part of their business by purchasers, the latter
knowing full well that they have an absolute out,
plus interest and attorneys fees, if the business
flounders.”
18
Donald J. Weidner
Brown v. Rairigh: Second rationale for
denying recovery (estoppel)
Obviously uncomfortable with its “common enterprise”
rationale, the court offered an alternative rationale for
deciding against the plaintiff investor:
“If an investor is fully informed as to all aspects of his
investment prior to purchase and if he is fully aware
of the use to which his proceeds will be put, then in
such event his conduct, when considered together
with other facts and circumstances, may well estop
him from seeking relief under the Blue Sky Laws,
providing however that the promoter or issuer is not
in the business of promoting or issuing . . . .”
19
Donald J. Weidner
Brown v. Rairigh: A Third Possible Rationale
• Did the plaintiff and the defendant become partners?
• The third rationale is that the situation is more properly
governed by partnership law rather than by securities
law.
• We shall see subsequent cases in which the courts, in
deciding whether to expand the concept of “investment
contract,” ask whether there is some other law, other
than securities law, that provides sufficient protection to
the person claiming to have purchased a security.
• In Brown v. Rairigh, it seems clear that the plaintiff and
the defendant formed an inadvertent partnership. They
were co-owners of a business for profit who also shared
losses.
20
Donald J. Weidner
Williamson v. Tucker (5th Cir.) (on unusual
cases in which an interest in a partnership is
a security)
• A general partnership or joint venture interest can be a security
in special circumstances:
(1) if the agreement among the parties leaves so little power in the
hands of a partner or venturer that power is distributed as in a
limited partnership [emphasis on the agreement];
(2) if a partner or venturer is so inexperienced and
unknowledgeable as to be incapable of intelligently exercising
the partner or venturer’s powers [emphasis on the investor]; or
21
Donald J. Weidner
Williamson v. Tucker (cont’d)
(3) if a partner or venturer is so dependent on some
unique entrepreneurial or managerial ability of
the promoter or manager that the partner cannot
– replace the manager or
– otherwise exercise meaningful partner or joint
venturer powers.
[Emphasis on the manager].
• We’ll see further case law on this issue.
22
Donald J. Weidner
United Housing Foundation, Inc. v. Forman
(Supplement p. 105)
• Mitchell-Lama Act project for low-cost cooperative
housing. N.Y. Housing Finance Agency provided 40year, Below Market Interest Rate loans to the
developer, who also received substantial tax
exemptions.
• Developer agreed to operate on a nonprofit basis and
lease only to people with incomes below a certain
level who had been approved by the state.
• The motivating force was United Housing Foundation
(UHF), a nonprofit corporation composed of labor
unions, housing cooperatives and civic groups.
– UHF had sponsored the construction of several
major N.Y. co-ops.
23
Donald J. Weidner
United Housing Foundation, Inc. v.
Forman (cont’d)
• Those who wished to occupy the apartments were
required to purchase shares of stock in the Riverbay
Corporation
– Which was organized by UHF
• Riverbay Corporation was organized to own and
operate the buildings that constituted the project
known as “Co-op City”
• The number of shares in Riverbay a purchaser was
required to buy depended upon the size of the
apartment the purchaser wanted to occupy.
– Ex., the cost of the 72 shares needed for a 4-BR
apartment was $1,800.
– “[I]n effect, [the share] purchase “is a recoverable
deposit on an apartment.”
24
Donald J. Weidner
Forman (cont’d)
• Shares were explicitly tied to the apartment,
– they could not be transferred to a non-tenant,
– they could not be pledged or encumbered.
– they descended, along with the apartment, only to
a surviving spouse.
• Each shareholder-occupant was entitled to one
vote—the vote attached to the apartment, not to the
shares.
• Any occupant who wanted to vacate was required to
offer the stock back to the corporation at cost.
25
Donald J. Weidner
Forman (cont’d)
• In 1965, Riverbay circulated offering literature that
estimated an anticipated construction cost of $280
million.
– With an average cost of $230 per room
• The final HFA blanket mortgage, the debt service on
which was to be paid out of the “rent” from the
shareholder-tenants, was 50% more than originally
estimated, at more than $400 million.
– With an average cost of $400 per room (almost
double that announced in the offering literature).
26
Donald J. Weidner
Forman (cont’d)
• It is clear that, if this were a security, there was a violation
of the securities law because of the failure to disclose the
following material facts:
– the estimated cost of construction was very low; and
– this sponsor had a prior history of cost-overruns;
– CSI, the general contractor and sales agent, was a
wholly-owned subsidiary of UHF;
– CSI had insufficient liquidity to complete the project
and
– the State Housing Commission had waived the liquidity
requirements to approve CSI as the contractor.
27
Donald J. Weidner
Forman (cont’d)
Most basically, the purchasers sued under §10b of the Securities Exchange
Act of 1934:
“It shall be unlawful for any person in the offer or sale of any
securities by the use of any means or instruments of
transportation or communication in interstate commerce or
by use of the mails, directly or indirectly(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact necessary in order to make the statements
made, in the light of the circumstances under which they
were made, not misleading [that is, non-disclosure is a
violation], or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.”
28
Donald J. Weidner
Forman (at 2d Circuit)
•
The Question: was there a sale of a “security.”
– The purchasers say their “stock” was “stock” within
the statutory definition of “security.”
•
The 2d Circuit held there was a “security,”
finding three sources of expected “profit” for the
purchasers:
(1) rent reductions through income generated from the
leasing of commercial facilities, professional offices
and parking spaces and from community washing
machines.
(2) tax deductions for the portion of each occupant’s
“rent” that was traceable to interest on the mortgage
encumbering the project.
(3) rent reductions through subsidies.
29
Donald J. Weidner
Forman (at Supreme Court)
• The Supreme Court reversed, stating that, even though
the interests the occupants purchased were called
“stock”:
– “they lack . . . the most common feature of stock:
the right to receive ‘dividends contingent upon an
apportionment of profits’.”
• The Court said the interests also lacked “the other
characteristics traditionally associated with stock”:
– they are not negotiable;
– they cannot be pledged or hypothecated;
– they confer no voting rights in proportion to the
number of shares owned; and
– they cannot appreciate in value.
30
Donald J. Weidner
Forman (Supreme Court, Cont’d)
• “In short, the inducement to purchase was solely to
acquire subsidized low-cost living space, it was not to
invest for profit.”
• Supreme Court said there was no expectation of profit
– “By profits, the Court has meant either [a] capital
appreciation resulting from the development of the
original investment . . . or [b] a participation in earnings
resulting from the use of investor funds . . . .”
• Supreme Court adopted Glenn Turner “entrepreneurial or
managerial” spin on the “solely or primarily” test.
– “The touchstone is the presence of an investment in a
common venture premised on a reasonable expectation
of profits to be derived from the entrepreneurial or
managerial efforts of others.”
31
Donald J. Weidner
Forman (Supreme Court rejected 2d
Circuit’s finding of “profits”)
A. Tax Benefits
1. There is no authority that a payment of rent
used to pay interest is a profit because it
has become deductible.
2. The deductibility of interest as an owner in
Co-Op City is no greater than that of any
other homeowner.
3. Deductibility does not result from the
managerial efforts of others.
B. Subsidies.
1. Can not be liquidated for cash.
2. Do not result from the managerial efforts of
others.
32
Donald J. Weidner
Forman (Supreme Court Rejected the 2d
Circuit’s finding of profits)
C. Net Income from Commercial Rental,
Parking, Washing Machines.
1. Is far too speculative and insubstantial.
2. May be properly viewed as a rebate
1. from facilities patronized only by the tenants.
3. Was never an inducement because it was never
mentioned in the offering circular.
4. Facility leases were made to provide essential
services to tenants, rather than to generate profit
by providing services to others.
33
Donald J. Weidner
Forman (rejects Silver Hills and finds only
limited risk)
• Supreme Court declined to adopt California’s
Silver Hills (risk capital) approach.
• Alternatively, even under risk capital, this
investment does not meet the test because the
purchasers “take no risk in any significant sense.”
– “[I]n view of the fact that the State has financed over
92% of the cost of construction and carefully regulates
the development and operation of the project,
bankruptcy in the normal sense is an unrealistic
possibility.”
– “[T]he risk of insolvency of an ongoing housing
cooperative ‘differ[s] vastly’ from the kind of risk of
‘fluctuating’ value associated with securities
investments.”
34
Donald J. Weidner
Analog to 10b
• Fla. Stat. 517.301(1) is a provision that
echoes the ‘34 Act’s 10b
• Florida’s nondisclosure rule, however, is
more broad. It applies
– “In connection with the rendering of any
investment advice” and
– “in connection with the offer, sale, or purchase of
any investment or security”
35
Donald J. Weidner
Wals v. Fox Hills Dev. Corp.(7th Cir. 1994)
(Supplement p. 135)
•
1990, Buyers purchased “‘week 5” of an apartment, which is in
February, in a recreational condominium project outside
Manitowoc, Wisconsin, that featured an extraordinary golf
course.
• Contemporaneously, Buyers entered into two agreements that
were renewable annually:
1. A “flexible time” agreement, under which Buyers could swap
their week in February for a week in the summer; and
2. A supplement to the “flexible time” agreement called the “4share program,” under which:
a. the Buyers agreed not to occupy the unit during the
summer week obtained by the swap;
b. the Developer was authorized to rent the unit during the
summer week; with
c. the Buyers receiving the summer rental minus a 30% fee to
the Developer.
36
Donald J. Weidner
Wals v. Fox Hills Dev. Corp. (cont’d)
• Buyers claimed:
– that the side agreements constituted an “investment
contract” within the definition of “security”
– that the securities were not registered with the SEC
– that therefore they were entitled to rescind the sale of
an unregistered security.
• Judge Posner said that the effect of the supplemental
agreements was “to reduce the cost to them of their
investment in their own unit.”
– Reminiscent of Forman’s “rebate” language
• “Nothing is more common than for the developer . . . to
offer to rent out owned but temporarily unoccupied units
as the agent of the owner.”
37
Donald J. Weidner
Wals v. Fox Hills Dev. Corp. (cont’d)
• Judge Posner recognized that some other circuits
would hold this a security:
“Because the resulting division of rental income
makes the developer and the condominium
owner coventurers in a profit-making activity,
imparting to the condominium interest itself
the character of an investment for profit . . . ,
those circuits that believe that only ‘vertical
commonality’ is required to create an
investment contract would deem the
combination of sale and rental agreement in
this case an investment contract.”
38
Donald J. Weidner
Wals v. Fox Hills Dev. Corp. (cont’d)
• “Other circuits, including our own, require
more—require ‘horizontal commonality,’
that is, a pooling of interests not only
between the developer or promoter and each
individual ‘investor’ but also among the
‘investors’ (the owners of the condominiums,
in this case)—require, in short, a wheel and
not just a hub and a spoke.”
39
Donald J. Weidner
Wals v. Fox Hills Dev. Corp. (cont’d)
• “The benefits [of a real estate “investment”] can
be pecuniary or nonpecuniary, but the
combination of the ‘flexible time’ agreement with
the ‘4-share’ program converts the condominium
owner’s investment, even if only temporarily, into
a purely pecuniary investment, for the owner
obtains no consumption value from his property
when he is not occupying it.”
• “Even so, the optional character of the ‘flexible
time’ and ‘4-share’ agreements makes it difficult
to conceive of the sale of the condominium itself
as the sale of a security.”
– However, the contracts were optional in Howey
40
Donald J. Weidner
Wals v. Fox Hills Dev. Corp. (cont’d)
• Here, the unit owner “receives the particular rental on
that unit rather than an undivided share of the total
rentals of all the units that are rented out. The nature
of his interest thus is different from that of a
shareholder in a corporation that owns rental
property.”
• The Buyers “did not receive an undivided share of
some pool of rentals or profits. They received the
rental on a single apartment, albeit one not owned by
them (for it was not their week).”
• “There was a pooling of weeks, in a sense, because
the [Buyers] selected their summer swap week from
a ‘pool’ of available weeks. But there was not a
pooling of profits, which is essential to horizontal
commonality.”
41
Donald J. Weidner
Wals v. Fox Hills Dev. Corp. (end)
• The requirement of uniform disclosure to
investors “only makes sense if the investors are
obtaining the same thing, namely an undivided
share in the same pool of assets and profits.”
– Or if the purchased interests are fungible?
• “We can imagine a case . . . in which
undeveloped lots are marketed on a large scale
to unsophisticated investors who neither inspect
their lot before buying it nor ever build or occupy
a home on it—it is for them a purely speculative
investment—and while there is no pooling of
profits the investors regard the lots as fungible.”
42
Donald J. Weidner
Condominia As Securities—Relevant Structural
and Circumstantial Factors: Most Suggestive
Factors at Top
•
•
•
•
•
•
Structural
Time Sharing
Mandatory Rental Pool
Rental Agent
Predetermined
Developer Retains
Management Control
Optional Rental Pool
Other Income
Generation
•
•
•
•
43
Circumstantial
Emphasis on Profits
Through Rents
Emphasis on
Appreciation of
Particular Developer’s
Projects
Individuals purchase
several units
Part-time occupancy
the rule
Donald J. Weidner
Structural and Circumstantial Factors (cont’d)
•
•
•
•
•
•
Structural
Long Notice to Occupy
– Especially during prime
season
Freedom to choose rental
agent
No rental agent
Existing subdivision lot
plus house to be built
Lot
Completed house on lot
Circumstantial
• Purchasers live far from
unit
• Year-round occupancy
the rule
• Sales pitch based on
place to live
44
Donald J. Weidner
Registration Pressure Lifted
• Stuart Saft, Structuring Condominium Hotels, New York
Law Journal (March 11, 2013):
– “[A] small change in the federal securities laws
contained in the Jumpstart Our Business Startups Act
(the JOBS Act) [2012] could be used to permit the
nationwide sale of condominium units with . . . rental
pools without the need . . . to register the offerings with
the SEC. The JOBS Act permits sponsors to
acknowledge that the units are securities, but by
expanding an exemption under Regulation D, obviates
the need to register with the SEC if all of the investors
are accredited investors.”
• 10b-5 still applies.
• Blue Sky laws must also be checked.
45
Donald J. Weidner
Marine Bank v. Weaver (1982)
(Supplement p. 138)
2/28/78
Weavers
(Sam & Alice)
$
$50,000 CD
Marine Bank
6 year CD
FDIC insured up to
$40,000
LESS THAN 3 WEEKS LATER
3/17/78
Weavers
Pledged the CD to guarantee Bank loan of
$65,000 to Columbus Packing Co.
“In consideration for guaranteeing the
loan”, Columbus’ owners agreed to give
the Weavers:
Columbus Packing Co.
1) 50% of Columbus’ net profits for the
life of the guarantee;
2) $100 per month for the life of the
guarantee;
A. Already owed Marine
Bank $33,000 for prior
loans; and
3) right to use the Columbus barn and
pasture at the discretion of the owners of
Columbus Packing Co; and
B. Was substantially
overdrawn on its checking
account.
4) right to veto future borrowing of
Columbus Packing Co.
46
Marine Bank
In short, all but $3,800 of the
$65,000 was used to satisfy prior
bank claims (the bank kept $42,800
to itself) and the claims of other
creditors. The Weavers say the
bank solicited their guarantee and
told them the $65,000 would be
used as working capital. Columbus
is belly up. Bank is poised to go for
the Weavers’ CD. The Weavers
cry “security.”
Donald J. Weidner
Marine Bank (cont’d)
• Justice Burger seemed to reject the most expansive reading
of Howey.
• Court’s starting point: The Act was adopted to restore
investor confidence in the financial markets.
• Court cites Howey but does not quote it or state its test.
• Justice Burger’s “test” is “what character the instrument is
given in commerce” by
– the terms of the offer,
– the plan of distribution, and
– the economic inducements held out to the prospect.
• He then admonishes against expanding the definition of
security too far: “Congress, in enacting the securities laws,
did not intend to provide a broad federal remedy for all
fraud.”
47
Donald J. Weidner
Marine Bank: the CD itself
• Purchasers received a fixed rate of interest
rather than dividends based on the bank’s
profits.
• Purchasers received no voting rights.
• The CD differs from other long-term debt
obligations because it “was issued by a
federally regulated bank which is subject to the
comprehensive set of regulations governing the
banking industry.”
– Therefor less risky?
• There is a long history that nearly all depositors
in failing banks receive full payment, even
beyond the insured amount.
48
Donald J. Weidner
Marine Bank: the CD itself (cont’d)
• “It is unnecessary to subject issuers of bank
certificates of deposit to liability under the
antifraud provisions of the federal securities
laws since the holders of bank certificates of
deposit are abundantly protected under the
federal banking laws.”
– Note the interesting and fundamental
jurisprudential point—it is “unnecessary” to
interpret a statute a particular way because other
law provides sufficient protection.
49
Donald J. Weidner
Marine Bank: the loan guarantee
• 3d Circuit had emphasized: Purchasers received a
share of the slaughterhouse profits that would
result from the efforts of its managers.
• Reversing, the Supreme Court stated:
Congressional intent was to cover [only] “those
instruments ordinarily and commonly considered to
be securities in the commercial world.”
• “The unusual instruments found to constitute
securities in prior cases involved offers to a
number of potential investors, not a private
transaction as in this case.”
50
Donald J. Weidner
Marine Bank: the loan guarantee (cont’d)
• Here, by contrast:
– the Company distributed no prospectus to the
purchasers or to anyone else.
– the unique agreement they negotiated was not
designed to be traded publicly (underscored by
the use of barn and pasture).
– the provision that gave the purchasers the right to
veto future borrowing gave them a measure of
control “not characteristic of a security.”
51
Donald J. Weidner
Marine Bank (conclusion)
• On the one hand:
– “[W]e hold that this unique agreement negotiated
one-on-one by the parties, is not a security.”
• On the other hand:
– “It does not follow that a . . . business agreement
between transacting parties invariably falls outside
the definition of a security as defined by the
federal statutes.”
• Effect on Denney’s Restaurants?
• Effect on Brown v. Rairigh?
52
Donald J. Weidner
Rivanna Trawlers Unlimited v. Thompson
Trawlers, Inc. (1988)
(Supplement p. 148)
• August, 1982, Rivanna Trawlers (“RTU”) was formed
when 23 parties executed a general partnership
agreement to “acquire, own, lease and operate multipurpose [commercial] fishing vessels”
– Why was a general partnership used?
• August 30, 1982, RTU purchased 4 fishing boats and
entered an agreement for their management and
maintenance with Thompson Management, Inc.
• Spring, 1983, the partners were concerned with
operations and considering management changes.
• The partners
– replaced RTU’s external managers twice and
– removed RTU’s original managing partner and
replaced him with a committee.
53
Donald J. Weidner
Rivanna Trawlers (cont’d)
• A number of the partners claim they purchased securities
without the full disclosure required by Section 10b-5
• They sued, among others, the original managing partner
and the original external manager.
• 4th Circuit, through former U.S.S.Ct. Justice Powell, says
the “critical issue” is the “solely from the efforts of others”
prong of Howey:
“General partnerships ordinarily are not considered
investment contracts because they grant partners—the
investors—control over significant decisions of the
enterprise.”
– Marine Bank said the power to veto future loans was
more control than usually found in securities.
– General partners typically have much more power than a
right to veto future loans.
54
Donald J. Weidner
Rivanna Trawlers (cont’d)
• How much investor control negates a finding that profits
are “solely through the efforts of others?”
• Williamson is a “narrow exception” to the “strong
presumption” that a general partnership interest is not a
security.
• A partnership “can be an investment contract only when
the partners are so dependent on a particular manager
that they cannot replace him or otherwise exercise
ultimate control.”
• FN 5: It is not necessary that they be able to replace a
manager with themselves, it is enough that they are
reasonably capable of finding a replacement manager.
• Further, partners can not turn their investment into a
security by remaining passive.
55
Donald J. Weidner
Rivanna Trawlers (cont’d)
• The “critical inquiry” is into the powers given the
general partners under the partnership
agreement.
• Issue is whether “those powers are sufficient to
allow the general partners to exercise ultimate
control, as a majority, over the partnership and
its business.”
• If the agreement gives a majority of the general
partners the power to control the business, the
presumption of no security “can only be rebutted
by showing that it is not possible for the partners
to exercise those powers.”
56
Donald J. Weidner
Rivanna Trawlers (cont’d)
• Even if general partners do not individually
have decisive control over major decisions,
“they do have the sort of influence which
generally provides them with access to
important information and protection against
a dependence on others.”
• Congress “did not intend to provide a federal
remedy for all common law fraud.” (citing
Marine Bank)
57
Donald J. Weidner
Rivanna Trawlers (cont’d)
• A court should not “look to the actual knowledge
and business expertise of each partner in order to
assess his or her individual ability intelligently to
exercise the power of a general partner.”
– “Such an inquiry would undercut the strong
presumption that an interest in a general partnership is
not a security.”
– “It would also unduly broaden the scope of the
Supreme Court’s instruction that courts must examine
the economic reality of partnership interests.”
• Don’t look too closely
– The complaints and briefs “properly speak only in terms
of the partners as a group.”
58
Donald J. Weidner
Rivanna Trawlers (The Agreement)
• Policy and management decisions required a
vote of 60% in interest
– including a vote to dissolve.
• At all times, each partner had
– reasonable access to the partnership’s books
(mandatory under partnership law) and
– the right to demand an audit.
• The partnership agreement required
unanimous consent to:
– transfer partnership interests
– admit additional partners
– distribute profits other than in proportion to
their respective interests.
59
Donald J. Weidner
Rivanna Trawlers (cont’d)
• What the court says about Virginia law in FN
8 is the law in every state.
• Each state has default rules that provide for
– equal management rights,
– delectus personarum (choice of the person),
– unanimous consent required to contravene the
partnership agreement and
– inspection and copying rights,
• except that many states no longer require the right to
inspect and copy “at all times.”
• “Normally, [the authority to manage their
investments] renders unnecessary the
protection of the federal securities laws.”
– Recall the word “unnecessary” in Marine Bank
60
Donald J. Weidner
Rivanna Trawlers (cont’d)
• “An investor who has the ability to control the profitability
of his investment either by his own efforts or by majority
vote in group ventures, is not dependent upon the
managerial skills of others.”
• These partners both had the authority and exercised it.
• “The fact that some of the general partners . . . lacked
financial sophistication does not affect the result. * * *
[M]embers of a general partnership who lack financial
sophistication or business expertise nevertheless may
exercise intelligently the powers conferred on them by
the partnership agreement and state law.”
– They have access to information and can consult
lawyers and accountants.
• “The real gravamen of appellant’s complaint lies in
common law fraud.”
61
Donald J. Weidner
Koch v. Hankins (9th Cir. 1991)
(Supp. P. 154)
• 160 doctors, dentists and their relatives each invested
between $23,000 and $500,000 in general partnerships
formed to purchase land to grow jojoba.
– Why were high net-worth individuals put in general
partnerships?
• Several of the promoters were accountants of the
investors.
• The lawyer-promoter, who drafted the documents, had
represented several of the investors.
• 35 general partnerships (averaging 4.5 partners each)
were formed and each partnership purchased 80 acres
from “selling corporations” owned by the promoters
– who had purchased the land from a common grantor.
62
Donald J. Weidner
Koch v. Hankins (cont’d)
• Investors allege they were told it was not
economically feasible to farm jojoba in 80acre tracts
– they saw themselves as buying shares in a 2,700
acre plantation.
• There was a common manager and field
office for all the general partnerships.
• Promoter was to sell Jojoba seeds and other
supplies to the partnerships.
• Each partnership agreement specified one
operating general partner and a number of
other general partners.
63
Donald J. Weidner
Koch v. Hankins (cont’d)
• Court: “within each partnership,” the general
partners have full control of the business:
– they can make decisions by majority vote.
– they can remove managers by majority vote.
– they can access partnership books and
records.
• None of the investors knew anything about
jojoba farming.
• Indeed, few in the United States knew anything
about jojoba farming.
64
Donald J. Weidner
Koch v. Hankins (cont’d)
• There was dispute about the actual participation
of investors
– Promoters said some of the investors were
very active.
– Investors said they were passive.
• Investors allege: even the investors who
nominally were operating general partners
merely acted as conduits for materials created by
the promoters
– including assessments to each partner for expenses.
• On appeal from summary judgment, the plaintiffs’
allegations were accepted as true.
65
Donald J. Weidner
Koch v. Hankins (and Williamson)
• Court’s starting point was Howey’s “control”
test.
• Court then looked to Williamson (5th Cir.) to
apply the control test to general
partnerships.
• Williamson looks ex ante and not ex post
– In contrast with Rivanna Trawlers
• Williamson looks both at the legal ability to
control and at the practical ability to control.
66
Donald J. Weidner
Koch v. Hankins (and Williamson)
1. The first Williamson factor focuses on the
agreement
– The issue: does the agreement allocate
powers as they would be allocated in a
limited partnership?
– The first Williamson factor “is addressed to
the legal powers afforded the investor by
the formal documents without regard to the
practical impossibility of the investors
invoking them.”
67
Donald J. Weidner
Koch v. Hankins (first Williamson factor)
• “As a legal matter, the partners have the
authority and responsibility to control every
aspect of the jojoba cultivation process.”
– additional assessments of capital must be
approved by 75% of the partnership.
– a majority of the units can remove any person
from a management position.
– decisions about management must be made
by a majority vote.
• Therefore, the promoters who sought to avoid
a finding of control “primarily through the
efforts of the promoter or of a third party”
passed muster under the first Williamson
factor.
68
Donald J. Weidner
Koch v. Hankins (second Williamson factor)
2. The second Williamson factor focuses on the
investor
– The issue: is the investor too inexperienced and
unknowledgeable to intelligently exercise the
powers the investor has under either the
partnership agreement or under partnership law?
• Lack of knowledge about jojoba farming is not
dispositive.
• They each had $23,000 or more to invest
(and is therefore sophisticated?).
• Because there was an insufficient record on
this issue, the court remanded.
• What did Rivanna Trawlers say?
69
Donald J. Weidner
Koch v. Hankins (third Williamson
factor)
3. The third Williamson factor focuses on the promoter or
manager
• The issue: is there a unique entrepreneurial or
managerial ability in the promoter or manager such that
the partner (presumably, the partners as a group)
cannot replace the manager or exercise meaningful
partnership powers?
• Here, there was reliance on a 2,700-acre plantation.
• Analogy: like being able to control only one room in a
hotel.
• The investors in a partnership could “readily order the
on-site manager to cease cultivating their particular
plot.”
• However, there was no formal mechanism to effect a
change on behalf of all 35 partnerships.
70
Donald J. Weidner
Koch v. Hankins (cont’d)
• It was almost impossible to effect a change on
behalf of all 35 partnerships
– the investors did not even know the names of
the other members of their own partnerships,
– much less of the other 34 partnerships.
• Stated differently, the information, organization and
coordination costs were too high to exercise the
legal right to effect an overall change.
• Further, it was unclear whether alternative jojoba
farm managers were available.
71
Donald J. Weidner
Koch v. Hankins (cont’d)
• “[E]ven if a general partner vigorously exercised his
or her rights under the partnership agreement, he or
she arguably could have no impact on the investment
(other than to ensure its failure by withdrawing from
the larger plantation).”
• The court reversed the grant of summary judgment
for the defendant-promoters and remanded for
factual findings on:
– The necessity of participating in the 2,700 acre
plantation and
– The ability to affect decision making regarding that
larger plantation.
72
Donald J. Weidner
Koch v. Hankins (cont’d)
•
Court said it did not need to get to two
further investor arguments:
1. that the general partnership agreement was
drafted to avoid the application of the securities
laws; and
2. that the investment was a security under the
Silver Hills “risk capital” analysis.
• There is no subsequent substantive history
to this case.
73
Donald J. Weidner
Steinhardt Group, Inc. v. Citicorp (3d Cir.1997)
(Supp. P. 164)
• Citicorp had a “severe financial crisis.”
– It had lots of bad real estate loans and illiquid
assets.
• “The securitization transaction was thus
conceived by Citicorp to remove the
nonperforming assets from its financial books and
replace them with cash.”
• Citicorp Securities Inc. (“CSI”) made presentation
to Steinhardt describing annual returns of 18% or
more by investing in Bristol Limited Partnership
(“LPP”).
74
Donald J. Weidner
Steinhardt Group, Inc. v. Citicorp (cont’d)
• Citicorp emphasized its Non-Performing Loan
“Pricing Model” as an accurate means
– of pricing the mortgage loans and REO
(Real Estate Owned by Citicorp as a result
of foreclosure) properties and
– of providing Steinhardt the promised 18%
or greater return on its investment.
• Steinhardt alleged that Citicorp knew at the
time it made the representations that several
of the pricing model’s assumptions were
false.
75
Donald J. Weidner
Steinhardt Group, Inc. v. Citicorp
(cont’d)
• Steinhardt claimed that Citicorp’s Pricing
Model was based on inflated valuations from
brokers
– who were promised that they would be
hired to list the properties for sale if
Citicorp was satisfied with their valuations
• Steinhardt alleged various other
misrepresentations and concealments.
• In short, Steinhardt claimed that the
cumulative effect of the misrepresentations
and concealments was to fraudulently inflate
the purchase price of the entire portfolio.
76
Donald J. Weidner
Steinhardt Group, Inc. v. Citicorp—the
transaction
Citibank and CNAI
Steinhardt
(Citibank of North America
Inc.)
(investment firm)
Sale of a portfolio
of
3,100 M loans +
900 REO Properties
Steinhardt contributed
$42 million (10% of
purchase price of the
portfolio) to the capital
of Bristol LPP.
Bristol LPP
GP: BGO (1% interest)
To issue debt securities
(nonrecourse bonds to be
underwritten by CSI [Citicorp
Securities Inc.]) and equity
securities, in the form of
partnership interests, to repay the
Citibank and CNAI loans (the
“bridge financing).
LP #1: Steinhardt (thru its
affiliate, C.B. Mtge., LPP)
holds a 98.79% interest
K: Ontra to service
the properties. Ontra
affiliate, BGO,
Became GP for a 1%
contribution (Ontra
owns 100% of BGO)
ONTRA
LP #2: OLS, Inc. (an Ontra
affiliate) .21% Int.
Bristol LLP
BGO refused Steinhardt’s
demand to sue Citicorp on
behalf of Bristol.
77
Donald J. Weidner
Steinhart (cont’d)
• At the time of the initial letter agreement with Steinhardt,
Citicorp was negotiating a “lock up” agreement with Ontra
– under which Citicorp was to have a right of first refusal on all of
Ontra’s assets and stock.
• CSI was to underwrite the securities issued by LLP:
– Citibank and CNAI were to bear all of the costs to
issue the securities.
• Although CSI determined the structure of the
securitization,
– Steinhardt had approval rights, and
– the economic and other terms of the debt securities
were not to adversely affect Steinhardt’s return on its
investment.
78
Donald J. Weidner
Steinhart (Howey factors)
•
“The Howey test still predominates in
investment contract analysis today.”
1.
2.
3.
4.
Investment of money is clear here.
Expectation of profit is clear here.
Was there a common enterprise?
Was the profit to be derived solely or
primarily through the essential managerial
efforts of a promoter or third party?
79
Donald J. Weidner
Steinhart (common enterprise)
• The District Court said no security because no
“common enterprise.”
• 3d Circuit said it has applied “a horizontal
commonality approach.”
– “[H]orizontal commonality requires a pooling of
investors’ contributions and distribution of
profits and losses on a pro-rata basis among
investors.”
• Sounds like the 7th Circuit’s Posner in Wals v. Fox
Hills a few years earlier
80
Donald J. Weidner
Steinhart (common enterprise)
• Steinhardt argued:
1.there was horizontal commonality.
2.In the alternative, vertical commonality
should be sufficient.
• 3d Circuit avoided the common enterprise
requirement and its commonality issue by
concluding that the transaction was not
“solely or primarily through the efforts of
others.”
81
Donald J. Weidner
Steinhart (solely or primarily)
• Court: “To resolve . . . whether Steinhardt’s
involvement in the [LPP] was limited to that of a
passive investor, we must look at the transaction
as a whole, considering the arrangements . . . for
the operation of the investment vehicle . . . to
determine who exercised control in generating
profits for the vehicle. The Limited Partnership
Agreement (“LPA”), which establishes the relative
powers of the partners in running the enterprise,
therefore governs our inquiry.”
82
Donald J. Weidner
Steinhart (solely or primarily)
• Steinhardt argued: It was a passive investor
because it was a limited partner in a limited
partnership that operated in compliance with
Delaware’s Revised Uniform Limited
Partnership Act (“DRULPA”).
• Stated differently, Steinhardt argued they did
not take part in “control” within the meaning of
DRULPA.
– And so should be seen as passive
investors within the meaning of the
securities law
83
Donald J. Weidner
Steinhart (the agreement)
• The LPA provided that the Managing Partner could not
take “Material Actions” without the consent of a
“Majority of the Partners.
– “Majority of the Partners” was defined as those partners holding
greater than 50% of the Percentage Interests
– Therefore “Steinhardt alone constitutes a ‘Majority of the
Partners.’”
• Even though there were two other partners
• Steinhardt approved the LPP’s “interim business plan,”
which Citicorp drafted and which was adopted on the
formation of the LPP.
• The Majority partner could propose, approve or
disapprove of business plans and their modification.
• The general partner could be removed without notice if
it failed to use its best efforts to implement Material
Action proposed by the Majority.
84
Donald J. Weidner
Steinhart (the “control” limitation under state
law)
• Court said the LPA was “carefully constructed” to give
Steinhardt “significant control without possibly running
afoul of” DRULPA.
– “Indeed, Steinhardt has proposal and approval
rights rather than more affirmative responsibilities.”
• Steinhardt emphasized the following “limitation of
control” language from DRULPA as it then stood:
– “Except for specific rights to propose and
approve or disapprove . . . the limited partners
shall not take any part whatsoever in, or have any
control over, the business or affairs of the
partnership, nor shall the limited partners have any
right or authority to act for or bind the partnership.”
85
Donald J. Weidner
Steinhart (on “control”)
• The 3d Circuit properly rejected Steinhardt’s
argument that, because it did not exercise control
under DRULPA, it did not exert control for Howey
purposes:
DRULPA “defines control . . . solely for the purpose
of limiting the liability of the limited partners to third
parties—a situation not present here. This does not
necessarily equate to the threshold for finding a
passive investor under federal securities laws.”
• In short, the ULPA at the time had a broad safe
harbor for how much the LPs could do without
exercising control.
– Today (in Florida), LPs can exercise control without losing
their limited liability.
86
Donald J. Weidner
Steinhart (on “control”)
• Federal law “determines whether the
investor’s involvement is significant enough to
place it outside the role of a passive
investor.”
– Steinhardt’s rights and powers under the
agreement “were not nominal, but rather,
were significant and, thus, directly affected
the profits it received from the Partnership.”
– Therfore, no “security.”
• They can control all the deck chairs on the
Titanic?
87
Donald J. Weidner
Tschetter v. Berven
(Supplement p. 175)
• In 1994, the Venerts agreed with Country Hospitality
Corporation (CHC) to develop several Country Kitchen
Restaurants.
• On March 29, 1995, the Venerts signed “Articles of
Organization” of Huron Kitchen, LLC
– An LLC is formed by filing these “Articles of Organization”
– The LLC was to construct and own a Country Kitchen restaurant
• An Operating Agreement was entered into in the Spring of
1995.
• The Venerts solicited the Tschetters with a Business Plan
for the LLC that listed the Venerts as the “Project
Development Team.”
• In July 1995, the LLC entered into a 15-year management
agreement with CHC (“Manager”).
88
Donald J. Weidner
Tschetter v. Berven (cont’d)
• Pursuant to the outside Management
Agreement, the LLC agreed not to
– “interfere or involve itself with the day-to-day
operations of the Restaurant, and Manager may
operate the Restaurant free from interference by the
Owner or representative of the Owner.”
• With this outside management agreement in
place, in the Fall of 1995, the Venerts sold
interests in Huron Kitchens LLC to the
Tschetters
– The Tschetters purchased “units” in the LLC, totaling
a 3/11 ownership interest in the LLC, for $101,250
• The restaurant opened in the Fall of 1995.
89
Donald J. Weidner
Tschetter v. Berven (cont’d)
• The restaurant experienced financial difficulties.
• The Tschetters and others personally guaranteed bank
loans to the LLC and “apparently” terminated the [outside]
Manager pursuant to the Management Agreement on the
ground of default.
• Nevertheless, the restaurant’s difficulties continued and it
closed in November, 1996.
• Tschetters sue the Venerts for breach of South Dakota’s
version of the Uniform Securities Act.
• The trial court dismissed the Tschetters’ claims as a
matter of law and the Supreme Court affirmed.
90
Donald J. Weidner
Tschetter v. Berven (solely or primarily)
• State Law in General. Rejecting the
investors’ claims, the Supreme Court first said
that, under S.D. law, the Tschetters, as
members of an LLC, had “substantial rights
and powers.”
– the members of [a member-managed LLC] have
management powers in proportion to their
contribution to capital
• this is not the universal default rule
– the members of an LLC have the power to elect
the managers of the LLC and
– the members have the power to determine the
responsibilities of the managers of the LLC
91
Donald J. Weidner
Tschetter v. Berven (solely or primarily)
• This Particular Operating Agreement. Court
next said that this Operating Agreement vests
management powers in the members, which
included the Tschetters.
• The members:
– received notice of meetings
– could call meetings
– day-to-day decisions were made by two
managers, who were required to be LLC
members
– members had access to all records
– members could authorize loans
92
Donald J. Weidner
Tschetter v. Berven (solely or primarily)
• The members also:
– could select an attorney
– had the right to receive profits and distributions
– could authorize incidental expenses up to a total
of $12,500
– could take other routine action
– could elect officers for the LLC and
– could remove the LLC accountant without cause.
93
Donald J. Weidner
Tschetter v. Berven (solely or primarily)
• The majority rejected the Tschetters’
argument that the outside Management
Agreement took control from them (effectively
trumping the LLC’s own Operating
Agreement):
– “[O]ur inquiry is the Tschetters role in the Huron
LLC. The fact that Huron LLC acquiesced in
management powers to CHC is not
determinative.”
• They couldn’t control any of the deck chairs?
– “The Huron LLC retained the ability to terminate
the management contract if the manager failed to
perform ‘any material . . . agreement . . . for a
period of thirty days.’”
94
Donald J. Weidner
Tschetter v. Berven (Majority versus Dissent)
• Majority’s presumption: “Only in unusual
circumstances would [a member of] a membermanaged LLC be able to argue that they must rely on
the entrepreneurial efforts of others rather than on
their own management skills.”
• Contrast the dissent: “By the time the Tschetters
received their interests in Huron LLC, their hands had
effectively been tied by Venerts through the
management agreement”
– the management agreement governed the
LLC’s only asset.
– a right to cancel by declaring a default is
potentially costly.
95
Donald J. Weidner
Tschetter v. Berven (More from the Dissent)
• The dissent said the inquiry can not be limited to the role
the investors have within the LLC itself.
• The only asset was the restaurant, and the Management
Agreement locked them out of controlling that.
• Even if they could cancel the Management Agreement,
they were still subject to the Country Kitchen franchise
agreement and would need an experienced Country
Kitchen manager.
– As in the jojoba farm case (Koch v. Hankins), no such person
might be available.
• The “undeniably significant” efforts, “those essential
managerial efforts which affect the failure or success of
the enterprise,” were being made outside the LLC.
96
Donald J. Weidner
Tschetter v. Berven (More from the Dissent)
• There should not be the same presumption
against classifying LLC interests as securities
that there is against classifying general
partnership interests as securities.
• LLCs are different from partnerships,
because there is no personal liability of
members.
– Therefore, there is less incentive to be
informed about, or take an active role in,
the business.
• But the members here personally guaranteed the loans
97
Donald J. Weidner