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
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 ..
What is “security”?
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
Enumerated
“Catch all”
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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,
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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.
SEC v. HJ Howey Co
(US 1946)
“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,
Apply to real estate …
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 CorpPacific -- 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 Dwopsoperated 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.
Apply to business interests …
Business interests - security?
A - Albert and Amanda
invest in an Scorporation 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.
The end