Opinion ID: 437476
Heading Depth: 3
Heading Rank: 2

Heading: Text of the definitions and early interpretations

Text: 32 The definition of security under both Acts begins with an enumeration of specific terms--note, stock, bond, debenture--and then proceeds to more general phrases, including investment contract. This procession from the specific to the general did not escape the Supreme Court's attention on its first occasion to consider the definition of security. In SEC v. C.M. Joiner Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943), the Court observed: 33 In the Securities Act the term security was defined to include by name or description many documents in which there is common trading for speculation or investment. Some, such as notes, bonds, and stocks, are pretty much standardized and the name alone carries well-settled meaning. Others are of more variable character and were necessarily designated by more descriptive terms, such as transferable share, investment contract, and in general any interest or instrument commonly known as a security. We cannot read out of the statute these general descriptive designations merely because more specific ones have been used to reach some kinds of documents. Instruments may be included within any of these definitions, as a matter of law, if on their face they answer to the name or description. However, the reach of the Act does not stop with the obvious and commonplace. Novel, uncommon, or irregular devices, whatever they appear to be, are also reached if it be proved as [a] matter of fact that they were widely offered or dealt in under terms or courses of dealing which established their character as investment contracts, or as any interest or instrument commonly known as a 'security.'  34 320 U.S. at 351, 64 S.Ct. at 123 (emphasis added). Thus, the Supreme Court recognized that instruments like stock, bonds, and notes answer on their face ... to the name or description. The Acts' latter phrases, intended to supplement these common instruments, were devised to capture [n]ovel, uncommon, or irregular devices that were not so readily classified. This construction is consistent with the fact that the terms stock, bond, and note had well-defined meanings under state corporate law that Congress obviously had incorporated by reference, and that Congress did not intend the reach of the Act to stop with these well-defined terms alone. 35 The Court's next bout with the definition of security confirmed that the phrase investment contract also drew on state law for its content. In SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the Supreme Court held that in the words investment contract Congress had employed a term common in many state 'blue sky' laws. Id. at 298, 66 S.Ct. at 1102. Despite Justice Frankfurter's position in dissent that the phrase  'investment contract' is not a term of art, id. at 301, 66 S.Ct. at 1104 (Frankfurter, J., dissenting), the Court held that by including an investment contract within the scope of [the Act], Congress was using a term the meaning of which had been crystallized by [state] judicial interpretation[s]. Id. at 298, 66 S.Ct. at 1102. These state definitions, the Court held, had been broadly construed by state courts so as to afford the investing public a full measure of protection. Id. 36 Thus, by 1946 it was plain that the definitions in the 1933 and 1934 Act drew on state law for their content, and that in order to embrace novel or unusual investment schemes within the salutary provisions of the Acts, Congress supplemented standard state-law definitions of stock, note, etc., with more general phrases, including investment contract, drawn from state law. Joiner and Howey make plain that Congress did not intend to circumscribe the scope of the standard terms--stock, note, debenture--to that of the more generous phrases. To the contrary, that construction would turn the history of the Acts and the state-law definitions on their heads. Congress never intended that stock that did not also satisfy the definition of investment contract would not be within the Acts' terms. Rather, Congress intended that investment contracts that did not also satisfy the definition of stock would be within the Acts' terms. See Tcherepnin v. Knight, 389 U.S. 332, 343, 88 S.Ct. 548, 556, 19 L.Ed.2d 564 (1967) (Joiner rejected the respondents' invitation to 'constrict the more general terms substantially to the specific terms which they follow' ). 37 The language of the definition itself makes this consideration clear. As the Second Circuit recently noted, there would have been little reason for the drafters to have employed words like stock, bond, and note--which had clear definitions under state law--if their intention had been to include only those instruments that satisfied an economic reality test appropriate to the latter terms. If an economic reality test appropriate to these subsequent terms were intended, a substantial portion of each class of instrument would, in fact, not be within the definition. Golden v. Garafalo, 678 F.2d 1139, 1144 (2d Cir.1982). 38 To be sure, the Howey Court also admonished that [f]orm was [to be] disregarded for substance and that emphasis was [to be] placed upon economic reality. 328 U.S. at 298, 66 S.Ct. at 1102. Those words were written, however, in the context of disregarding the absence of a label like stock or note when novel schemes nonetheless constitute investments earning profits from the labor of others. They did not direct us to ignore the presence of an instrument that, as a matter of economic reality, is stock simply because it is not purchased by one who also entered into an investment contract. 39 In summary, neither the language, the history, the structure, nor the Acts' early interpretations suggest that the transfer of stock to effectuate the sale of all or part of a business is not the purchase or sale of a security. And several considerations--particularly Congress' express treatment of notes and its conferral on the SEC of the power to specify exempt securities--suggest the contrary. We now consider the impact of the context clauses on our analysis. 40