Opinion ID: 1060352
Heading Depth: 2
Heading Rank: 2

Heading: Initial Value Subject to the Risks of the Enterprise

Text: The second prong of the Brewer test requires that a portion of the initial value be subject to the risks of the enterprise. As the Brewer court stated, this second prong adopts the concept of risk capital. Brewer, 932 S.W.2d at 13. The Brewer court explained that [u]nder the risk capital test the focus is ... on whether the promoter is relying on the investors for a substantial portion of the initial capital necessary to launch the enterprise. Id. at 11 (citing State v. Consumer Bus. Sys., Inc., 5 Or.App. 19, 482 P.2d 549, 555 (1971)). QCI was looking for a quick means of financing a $50 million expansion. The promotional materials clearly stated that [b]y going to private investors, QCI is able to raise expansion capital quickly without having to give up valuable equity. These promotional materials clearly reflect the risk capital concept: investors were sought out by King, they paid value, and in return they expected QCI to pay them a return on their investment. Furthermore, investors did not rely on their own pay telephones to produce an income; instead, investors were dependent on the profitability of the entire enterprise. King argues that this prong is not met because the lease provided for a fixed payment that was secured by a performance bond. However, it is clear from the record that potential investors were led to believe that the transaction was an investment. QCI promotional materials invited participants to join our growing QCI network and pledged that it is QCI's business policy to share the profits with our clients, by paying them a very high rate of return. The chancery court found that the performance bond was essentially worthless from the outset because it was guaranteed by an insurance company that was neither registered nor qualified to do business in Tennessee. King asks this Court to look only at the structure of the transaction, to focus on the provision of the lease securing payment by a performance bond, and to ignore the reality that the performance bond was worthless. To do so would exalt form over substance, something which, in the interest of protecting the investors of this state, this Court refuses to do. Thus, we find that the second prong of the Brewer test is met.