Opinion ID: 2610242
Heading Depth: 2
Heading Rank: 1

Heading: The Initial Value Subjected to the Risks of the Enterprise.

Text: Each person who executes a Founder-Member Purchasing Contract Agreement is required by Hawaii Market Center, Inc. to make a one-time retail purchase of $320.00 in order to become a distributor and $820.00 in order to become a supervisor. The record indicates that the total wholesale cost to HMC of the purchased merchandise is $70.00 and $140.00 respectively. The appellants have made no attempt to characterize these transactions as the simple purchase of merchandise, nor do we deem them such. The terms of the offer and the inducements held out to the prospects clearly indicate that the substantial premiums paid by founder-members to HMC are given in consideration for the right to receive future income from the corporation. These overcharges constitute the offerees' investments or contributions of initial value, such value being subjected to the risks of the enterprise. It is uncontested that the recruitment of founder-members was motivated by the need to raise capital to finance the opening of the proposed Hawaii Market Center store. Inextricably bound to the success of this enterprise is the ability of the founder-members to recoup their initial investment and earn income. The recruitment fee paid to distributors and supervisors, during the pre-operational phase of the plan, rests upon the promoters' ability to sell the success of the plan to prospective members. In addition, those members who choose to rely solely on the second method of earning income, the payment of commissions based on sales, receive no return at all on their investment unless the store functions successfully. This latter point is particularly important because recruitment of members increases geometrically. Therefore, since membership is limited to five thousand, a very large percentage of founder-members will be totally dependent on sales commissions to recover their initial investment plus income. It is thus apparent that the security of the founder-members' investments is inseparable from the risks of the enterprise. The success of the plan is the common thread on which everybody's beads [are] strung. Securities & Exchange Commission v. C.M. Joiner Leasing Corp., 320 U.S. 344, 348, 64 S.Ct. 120, 122, 88 L.Ed. 88 (1943).