Opinion ID: 515232
Heading Depth: 3
Heading Rank: 2

Heading: Williamson Test.

Text: 27 The appellants rely on Williamson to argue that the partnership functioned de facto like a limited partnership. The appellants argue that the court must look to the actual participation of the investors and their relationship to the promoters to determine whether their general partnership interests are securities. The appellants' argument, like Williamson, goes too far. In Williamson, the Fifth Circuit examined the issue of whether general partnership interests in a real estate development scheme were securities. 12 The Williamson court noted the presumption that general partnerships are not securities and stated that plaintiffs have an extremely difficult factual burden if they are to establish that the [general partnership] interests they purchased are securities. Williamson, 654 F.2d at 424. In dicta, the court applied a three-part test to determine whether a general partnership interest that on its face creates a true partnership is a security. 28 A general partnership or joint venture interest can be designated a security if the investor can establish, for example, 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 venturer 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. 29 Id. The plaintiffs argue that their interests meet the Williamson test. Except for the first element, see Section C., infra, we decline to follow the Williamson test. 30 The two other prongs of the Williamson test create uncertainty in the area of business investing. They require that a promoter investigate the business experience and acumen of all potential investors and then tailor his offering to them. To some he might offer a general partnership interest, to others a security. Under the Williamson test, passage of time might also become a significant factor in determining whether an investment interest is a security. An interest marketed as a general partnership might be transformed into a security simply because its holder is not diligent or knowledgeable in exercising his rights under the agreement. The focus must be on the expectations the parties had in the original transaction. The 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.'  Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982) (emphasis added) (quoting SEC v. United Benefit Life Ins. Co., 320 U.S. 344, 352-53, 64 S.Ct. 120, 124, 88 L.Ed. 88 (1943)). See also Williamson, 645 F.2d at 424 n. 14; Vincent v. Moench, 473 F.2d 430, 435-36 (10th Cir.1973) (if parties treat the entity like a general partnership it is not a security). Thus, it is immaterial whether the partnership later fell into a pattern of circumscribed partnership participation by some partners. 31 The Williamson test would also require the courts to find an investment a security in relation to some investors and a partnership in relation to others. Such would be the result in the case presently before this court. Though as a whole, the investors here are a relatively sophisticated group, a few investors were not at all experienced in business affairs. Categorizing the plaintiffs in this fashion is untenable. 32 The Tenth and the Eighth Circuits follow the principle that regardless of the control actually exercised, if the partnership contract retains real power in the partners, then the investments are not securities. In Ballard & Cordell Corp. v. Zoller & Danneberg Exploration, Ltd., 544 F.2d 1059 (10th Cir.1976), cert. denied, 431 U.S. 965, 97 S.Ct. 2921, 53 L.Ed.2d 1060 (1977), the investors argued that their 50% working interest in two oil wells and lease units constituted an investment contract because the investors depended on the independent operator who worked the wells. Apparently, the operator--only related by contract to the seller of the lease units--had complete control over production decisions. The court, nevertheless, held that the terms of the agreement gave the investor the kind of control over his investment not found in a security. The court noted contract rights such as the right to select a new operator if the old operator pulled out, the right to refuse participation in specific operations, and the right to withhold consent for certain operating expenses. It found that these contract rights showed a degree of active control that precluded finding the interests to be investment contracts. Id. at 1065; see also Mr. Steak, Inc. v. River City Steak, Inc., 460 F.2d 666, 669 (10th Cir.1972) (contract rights determinative, actual delegation of contract powers and rights immaterial). 33 Similarly, the Eighth Circuit looks to the partnership agreement, and not to the actual participation of the investors in the scheme, to determine whether an interest is an investment contract. In Fargo Partners v. Dain Corp., 540 F.2d 912 (8th Cir.1976), the plaintiff bought an apartment complex and granted back to the vendor the exclusive right to manage the property. The agreement gave the vendor/manager complete control over management of the complex. The court, however, found the investment not a security based solely on the fact that the contract contained a 30-day cancellation provision. The cancellation provision alone gave the investor sufficient control over his investment that he was not dependent solely on the efforts of others. Id. at 914-15 (citing Mr. Steak ). In a case of even more tenuous investor control over the management of the investment, the Eighth Circuit found that a three year irrevocable management contract given to the vendor provided the investor with sufficient control over his investment because of the limited time span of the management contract. Schultz v. Dain Corp., 568 F.2d 612, 615-16 (8th Cir.1978). 13 34 In Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc., 650 F.Supp. 1378 (W.D.Va.1986), a case factually similar to the case at bar, a general partnership comprised twenty-three investors in a commercial fishing business. Some of the investors brought suit against the promoters and managers of the partnership. The court noted that the agreement gave the general partners typical partnership powers to direct and control the operations of the entity. It also gave the partners access to partnership records and the right to a private audit or accounting. Id. at 1381. The partners, a group of doctors and lawyers, did not exercise many of their partnership powers. The court, however, found that the actual control of the partners was irrelevant as long as the partnership agreement afforded them the power to act. 35 Even when 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.... The managerial powers and the right of inspection vested in general partners therefore takes them outside the intended scope of federal securities law. 36 Id. at 1383-84. 37 We agree with the Tenth and Eighth Circuits that the proper focus of the examination must be the contract. 38