Opinion ID: 199659
Heading Depth: 2
Heading Rank: 1

Heading: Investment Contracts.

Text: 14 The applicable regulatory regime rests on two complementary pillars: the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa, and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78mm. These statutes employ nearly identical definitions of the term security. See Securities Act of 1933 § 2(a)(1), 15 U.S.C. § 77b(a)(1); Securities Exchange Act of 1934 § 3(a)(10), 15 U.S.C. § 78c(a)(10). Congress intended these sweeping definitions, set forth in an appendix hereto, to encompass a wide array of financial instruments, ranging from well-established investment vehicles (e.g., stocks and bonds) to much more arcane arrangements. SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943). Included in this array is the elusive, essentially protean, concept of an investment contract. 15 Judicial efforts to delineate what is -- and what is not -- an investment contract are grounded in the seminal case of SEC v. W. J. Howey Co., 328 U.S. 293 (1946). The Howey Court established a tripartite test to determine whether a particular financial instrument constitutes an investment contract (and, hence, a security). This test has proven durable. Under it, an investment contract comprises (1) the investment of money (2) in a common enterprise (3) with an expectation of profits to be derived solely from the efforts of the promoter or a third party. Id. at 298-99. This formulation must be applied in light of the economic realities of the transaction. United Hous. Found., Inc. v. Forman, 421 U.S. 837, 851-52 (1975); Tcherepnin v. Knight, 389 U.S. 332, 336 88 S.Ct. 54819 L.Ed.2d 564 (1967); Futura Dev. Corp. v. Centex Corp., 761 F.2d 33, 39 (1st Cir. 1985). In other words, 16 substance governs form, and the substance of an investment contract is a security-like interest in a common enterprise that, through the efforts of the promoter or others, is expected to generate profits for the security holder, either for direct distribution or as an increase in the value of the investment. 17 Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 10 (1st Cir. 1993) (citations omitted). 18 The Supreme Court has long espoused a broad construction of what constitutes an investment contract, aspiring to afford the investing public a full measure of protection. Howey, 328 U.S. at 298. The investment contract taxonomy thus embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits. Id. at 299. 19 The Howey test has proven to be versatile in practice. Over time, courts have classified as investment contracts a kaleidoscopic assortment of pecuniary arrangements that defy categorization in conventional financial terms, yet nonetheless satisfy the Howey Court's three criteria. See, e.g., id. (holding that sale of citrus groves, in conjunction with service contract, qualifies as an investment contract); Teague v. Bakker, 35 F.3d 978, 981, 990 (4th Cir. 1994) (same re purchase of life partnership in evangelical community); Long v. Shultz Cattle Co., 881 F.2d 129, 132 (5th Cir. 1989) (same re cattle-feeding and consulting agreement); Miller v. Cent. Chinchilla Group, 494 F.2d 414, 415, 418 (8th Cir. 1974) (same re chinchilla breeding and resale arrangement). 20