Opinion ID: 2452400
Heading Depth: 2
Heading Rank: 1

Heading: did the joint venture inteests purchased by appelants constitute securities within the meaning of the arkansas securities act?

Text: The term security is defined in the Arkansas Securities Act, Ark.Stat.Ann. § 67-1247(0, (Repl.1966) as: `Security' means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral-trust certificate; preorganization certificate or subscription; transferable share; investment contract; variable annuity contract; voting-trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under such a title or lease; or, in general, any interest or instrument commonly known as a `security' or any certificate of interest or participation in, temporary or interim certificate for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. `Security' does not include any insurance or endowment policy or annuity contract or variable annuity contract issued by any insurance company. The Appellants' contention is that the joint venture interest which they purchased constituted an investment contract or a certificate of interest or participation in a profit-sharing agreement within the definition quoted above. This Court recognizes that regardless of labels, the Arkansas Securities Act was designed to protect both investors in common stock and those persons who in substance are the investors in the disguised business venture of another. This investor protection is accomplished through the definition of security. The definition should be flexible enough to encompass the endless succession of new and innovative or old and tried promotional schemes, where the promoters, by design, seek to risk the money or property of others in their venture. Recent stock market trends, coupled with the existing income tax structure, and other elements, including inflation, have had a material effect on the attitude of Arkansas citizens as to where to place their investment capital. As is graphically illustrated in the facts of the case before us, tax consequences of any investment have become, in the eyes of many, the predominant factor for gauging the success or failure of any venture. Investment schemes are now promoted perhaps more on what the tax losses to be generated by an investment will be rather than the income derived from the investment. It is paradoxical that because of the income tax structure, an investment which generates profit can be a bad investment, while a venture which generates a substantial paper loss becomes a good investment. With such shifting attitudes, there has been a rise in what initially appear to be new and innovative financing methods, for the creation of tax sheltered investments. Co-partnerships with public investors have recently been revitalized as a vehicle of conducting a business venture. The sale of limited partnership units in ventures ranging from oil and gas leases to herds of cattle, has come into vogue. Accordingly, if the Arkansas Securities Act is to protect the citizens of this state, then our definition of what constitutes a security must necessarily depend upon an analysis of all of the factors involved in any given transaction. The investment contract and certificate of interest or participation in any profit-sharing agreement security, frequently encompasses those unconventional means used by promoters to finance their ventures. This Court has not previously defined these terms. Arkansas adopted essentially the Uniform Securities Act as the Arkansas Securities Act in 1959, Ark.Stat. Ann. § 67-1235, (Repl.1966) et seq. Thirtythree other states have likewise adopted, in essence, the Uniform Securities Act. The Arkansas Securities Act of 1959 is remedial, and remedial legislation should be liberally construed. Chicago Mill & Lumber Co. v. Smith, 228 Ark. 876, 310 S.W.2d 803 (1958). The federal view of what constitutes an investment contract was first cited by the United States Supreme Court in Securities and Exchange Commission v. C. M. Joiner Leasing Corporation, 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943). There the promoters engaged in a campaign to sell assignments of oil leases covering some 4,700 acres. Leasehold subdivisions offered never exceeded 28 acres, and all buyers were given an opportunity to pay for their leasehold interest in installments. The driller agreed to drill a test well, financed primarily from the resale to the public of small parcels of lease acreage. The United States Supreme Court held that this scheme did not constitute simply sales and assignments of legal and legitimate oil and gas leases, which were only sales of interests in land. The Court noted that it was an economic interest in the well-drilling undertaking that produced the instruments that the promoters were selling, and gave to them most of their value and all of their lure. In reversing the case, the Supreme Court of the United States stated: Nor can we agree with the court below that defendants' offerings were beyond the scope of the Act because they offered leases and assignments which under Texas Law conveyed interests in real estate. In applying acts of this general purpose, the courts have not been guided by the nature of the assets back of a particular document or offering. The test rather 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. In the enforcement of an act such as that it is not inappropriate that promoters' offerings be judged as being what they were represented to be. [Emphasis added]. The next United States Supreme Court case defining an unconventional security as an investment contract, evolved from Securities and Exchange Commission v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). In that case the promoter owned large tracts of citrus acreage in Florida. The prospective customer was offered both a land sales contract and a service contract, after having been told that it was not feasible for the prospective customer to invest in a grove unless service arrangements were made. The purchases were usually made in narrow strips of land, so that an acre consisted of one row of 48 trees. The service contract was generally of a ten year duration, without the option of cancellation, and gave the service company full and complete possession of the acreage, with full discretion over what crops to plant, etc. In the finding of the term investment contract in the Howey case, the United States Supreme Court said: ... an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.... In the years following Howey , some courts have placed a literal emphasis on the Howey formula, while others recognized the remedial purpose of the Federal Securities Laws, and refused to give a mechanical value to Howey . For example, the Ninth Circuit Court of Appeals, in SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), found an investment contract to exist even though the investors were contributing some effort in a pyramiding investment program.