Opinion ID: 437476
Heading Depth: 3
Heading Rank: 1

Heading: The definition and exemption provisions

Text: 18 Section 2(1) of the 1933 Act as amended provides that the term security 19 means any note, stock, treasury stock, bond, debenture, ... investment contract, ... or, in general, any interest or instrument commonly known as a security.... 20 15 U.S.C. Sec. 77b(1) (1982). The legislative history to section 2(1) indicates that Congress cast the definition of security in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security. H.R.Rep. No. 85, 73d Cong., 1st Sess. 11 (1933). 21 Although Congress intended that the term security embrace those instruments that fall within the ordinary concept of a security, several important qualifications limit this definition. Preceding all of the definitions in the 1933 Act is the clause unless the context otherwise requires. The significance of the so-called context clause is addressed in Part III A 3 infra. 22 In addition, section 3 of the 1933 Act defines a number of important exempted securities. Among the defined exemptions in the 1933 Act is an exception for short-term notes. Section 3(a) provides that the Act shall not apply to: 23 Any note, draft, bill of exchange, or banker's acceptance which arises out of a current transaction ... and which has a maturity at the time of issuance of not exceeding nine months.... 24 15 U.S.C. Sec. 77c(a)(3) (1982). As one commentator has observed, Congress intended the short-term note exemption to free from the Act's registration requirements prime quality commercial paper sold to knowledgeable investors. The necessity for disclosure in a registration statement to these investors was less vital than for sales of other, more speculative paper to other, less knowledgeable buyers. 21 Congress did not, however, include the commercial paper exception in the antifraud provisions of the 1933 Act. See 15 U.S.C. Sec. 77q(c) (1982). 25 The 1933 Act also empowers the Commission to grant additional exemptions. Section 3(b) of the Act as amended provides that: 26 The Commission may from time to time by its rules and regulations, and subject to such terms and conditions as may be prescribed therein, add any class of securities to the securities exempted as provided in this section, if it finds that the enforcement of this subchapter with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering; but no issue of securities shall be exempted under this subsection where the aggregate amount at which such issue is offered to the public exceeds $5,000,000 [then $100,000]. 27 15 U.S.C. Sec. 77c(b) (1982). Congress envisioned that the Commission's exemption power would be reserved for needless registration of issues of such an insignificant character as not to call for regulation. H.R.Rep. No. 85, supra, at 15. According to the House Report, however, the Commission's exemption power was carefully limited by the prohibition on exemptions for issues larger than $100,000 (now $5,000,000), thus safeguard[ing] against any untoward pressure to exempt issues whose distribution may carry all the unfortunate consequences that the act is designed to prevent. Id. 28 The definition of security under the 1934 Act parallels that under the 1933 Act. Section 3(a)(10) of the 1934 Act provides that  'security' means any note, stock, treasury stock, bond, debenture, ... investment contract, ... or in general, any instrument commonly known as a 'security.'  15 U.S.C. Sec. 78c(a)(10) (1982). 22 One important distinction between the 1933 and 1934 Act definitions pertains to short-term notes: generally speaking, short-term notes that would be exempt from the registration provisions of the 1933 Act are exempted from the antifraud provisions of the 1934 Act. 23 And like the 1933 Act, section 3(a)(12) of the 1934 Act authorizes the SEC to grant additional exemptions for classes of securities either unconditionally or upon specialized terms and conditions. 24 15 U.S.C. Sec. 78c(a)(12) (1982). 29 Nowhere in these provisions is there an exemption for the sale of a controlling share of corporate stock. This conspicuous omission is significant for two reasons. First, Congress took pains to exempt certain commercial paper from the class of notes covered by the registration provisions of the 1933 Act and the antifraud provisions of the 1934 Act. When Congress wished to exempt a class of instruments from some or all of the Acts' provisions, it had little trouble in doing so expressly. 25 And while it might be argued that purchasers of large blocks of stock, often in face-to-face transactions, are more knowledgeable than the average investor--and therefore often less in need of protection--the same argument applies to the commercial paper exception. Congress exempted certain commercial paper in part because it is high-grade and purchased by knowledgeable investors; accordingly, the SEC approves for exemption only that commercial that is prime quality and of a type not ordinarily purchased by the general public. See note 15 supra. These arguments persuaded Congress to exempt prime quality commercial paper expressly. Congress did not, however, exempt particular stock transactions. Moreover, while Congress may not have considered the sale of all or part of a business by means of a stock purchase under the 1933 Act--the Act is, of course, primarily addressed to public offerings, see 15 U.S.C. Sec. 77d(2) (1982) (private offering exemption), and the sale of a business is frequently not effectuated by a public offering--the same cannot be said of the 1934 Act. It was always clear that the 1934 Act would, by its terms, apply to stock purchases comprising controlling corporate shares. Nor can it be said that Congress did not envisage face-to-face transactions; it has always been clear that the Act applies to face-to-face sales of stock as well as to transactions in the recognized markets. See Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982); Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 10, 12, 92 S.Ct. 165, 167, 169, 30 L.Ed.2d 128 (1971) (Congress meant to bar deceptive devices and contrivances in the purchase or sale of securities whether conducted in the organized markets or face to face). 26 30 Second, Congress vested in the SEC the responsibility for identifying certain securities for exemption. In addition, Congress empowered the SEC to attach conditions to any exemptions granted in order to protect the investing public. These decisions suggest that in the judgment of Congress the Commission, and not the courts, has the expertise and practical experience required to ensure that exemptions to the Act are prudently chosen, and that appropriate conditions are attached to any exemptions granted. Needless to say, the SEC has never exempted the purchase or sale of a controlling share of corporate stock from the definition of security. Thus we look on the plea that this court do so with some skepticism. 31