Document: 540 U.S. 389 SECURITIES AND EXCHANGE COMMISSIONv.EDWARDS. No. 02-1196. Supreme Court of United States. Argued November 4, 2003. Decided January 13, 2004. Respondent was the chairman, chief executive officer, and sole shareholder ETS Payphones, Inc., which sold payphones to public via independent distributors. The were offered with an agreement under leased back payphone from purchaser for a fixed monthly payment, thereby giving purchasers 14% annual return on their investment. Although ETS' marketing materials trumpeted "incomparable pay phone" as "an exciting business opportunity," did not generate enough revenue make payments required by leaseback agreements, so company depended funds new investors meet its obligations. After filed bankruptcy protection, Securities Exchange Commission (SEC) brought this civil enforcement action, alleging, among other things, that respondent had violated registration requirements antifraud provisions Act 1933 1934, Rule 10b-5 thereunder. District concluded sale-and-leaseback arrangement "investment contract" within meaning of, therefore subject to, federal securities laws. Eleventh Circuit reversed, holding (1) Court's opinions require offer either capital appreciation or participation in enterprise's earnings, thus exclude schemes offering rate return; (2) those opinions' requirement investment be derived solely efforts others satisfied when contractual entitlement return. Held: An scheme promising can "security" Section 2(a)(1) § 3(a)(10) 1934 define include contract," but do contract." This has established test determining whether particular is contract "whether involves money common enterprise profits come others." SEC v. W. J. Howey Co., 328 U. S. 293, 301. definition embodies flexible, rather than static, principle capable adaptation countless variable devised seeking use others' promise profits. Id., at 299. speaking are profits—in sense income return—that seek investment, they invest, may include, example, dividends, periodic payments, increased value There no reason distinguish between promises returns purposes test, understood. In both cases, investing attracted representations income. Moreover, investments pitched low risk (such "guaranteed" return) particularly attractive individuals more vulnerable fraud, including older less sophisticated investors. Under reading advances, unscrupulous marketers could evade laws picking promise. will read into limitation compelled language would undermine laws' purposes. Respondent's claim contracts conflicts precedent mistaken, distinction drawn blue sky law cases relied on, post-Howey decision contrary, see Housing Foundation, Inc. Forman, 421 837, 852-853. Dictum suggesting otherwise Reves Ernst & Young, 494 56, 68, n. incorrect. consistently maintained does preclude being contract. Circuit's alternative holding, respondent's falls outside because return, incorrect inconsistent precedent. Pp. 393-397. 300 F. 3d 1281, reversed remanded. O'CONNOR, J., delivered opinion unanimous Court. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR ELEVENTH CIRCUIT. Solicitor General Olson argued cause petitioner. With him briefs Deputy Kneedler, Matthew D. Roberts, Meyer Eisenberg, Jacob H. Stillman, Susan McDonald. Michael K. Wolensky respondent. brief Ethan Cohen.* JUSTICE O'CONNOR 1 "Opportunity doesn't always knock . sometimes it rings." App. 113 (ETS Payphones promotional brochure). And hangs up. So 10,000 people who invested total $300 million arrangements touted slogan. argues contracts, regulation case, we must decide moneymaking excluded term simply fixed, variable, 2 * Charles Edwards (ETS).† ETS, acting partly through subsidiary also controlled respondent, packaged site lease, 5-year management agreement, buyback agreement. All tiny fraction chose package, although options offered. purchase price packages approximately $7,000. received $82 per month, Purchasers involved day-to-day operation owned. selected phone, installed equipment, arranged connection long-distance service, collected coin revenues, repaired phones. promised refund full package end lease 180 days purchaser's request. 3 website, recent deregulation "open[ed] door individual phone owners operators." According "[v]ery few opportunities potential ongoing generation available today's telephone industry." 114-115 brochure); id., 227 website); 13 (Complaint ¶¶ 37-38). 4 September 2000, protection. action same month. It alleged §§ 5(a) (c) 1933, 68 Stat. 684, 15 C. 77e(a), (c), 17(a) 114 2763A-452, 77q(a), 10(b) 48 891, amended, 2763A-454, 78j(b), thereunder, 17 CFR 240.10b-5 (2003). 123 Supp. 2d 1349 (ND Ga. 2000). Appeals reversed. 1281 (CA11 2002) (per curiam). held contract, two grounds. First, earnings enterprise, schemes, such respondent's, 1284-1285. Second, our "derived others" 1285. We conclude erred II 5 "Congress' purpose enacting regulate investments, whatever form made name called." 61 (1990). To end, enacted broad "security," sufficient "to encompass virtually any instrument might investment." Ibid. Act, 77b(a)(1), 78c(a)(10), slightly different formulations have treated essentially identical meaning, Reves, supra, 61, 1, "any note, stock, treasury security future, bond, debenture, [or any] commonly known `security.'" "Investment itself defined. 6 293 (1946). look "embodies flexible static principle, one profits." 7 reaching result, first observed Congress included security, "was using been crystallized" state courts' interpretation "`blue sky'" 298. (Those precursors named, seems, "aimed promoters `would sell building lots fee simple.'" L. Loss Seligman, Regulation 36, 31-43 (3d ed. 1998) (quoting Mulvey, Blue Sky Law, 36 Can. Times 37 (1916)).) courts defined "a `the placing laying out way intended secure profit employment,'" "uniformly applied" variety situations where led invest expectation earn promoter [a third party]." Howey, 298 State Gopher Tire Rubber 146 Minn. 52, 177 N. 937, 938 (1920)). Thus, "profits" "come others," invest. used 8 income, case invitation "`watch add up.'" ¶ 38). See Rep. 102-261, App., p. 326 (1992) (Staff Summary Federal Trade Activities Affecting Older Consumers). 9 protests disagree. No used, formulating evidence Congress' understanding term. S., 298, 4. Indeed, promised. People White, 124 Cal. 548, 550-551, 12 P. 1078, 1079 (1932) (agreement defendant stated investor give $5,000, receive $7,500 year later); Stevens Liberty Packing Corp., 111 Eq. 62-63, 161 A. 193, 193-194 ("ironclad entitled $56 10 years initial $175, ostensibly breeding rabbits). None decisions contrary. 837 (1975), considered "shares" nonprofit housing cooperative identified "touchstone" "the presence venture premised reasonable entrepreneurial managerial then laid examples interests previously found "profits." 852. Those "capital resulting development investment" "participation investors' funds." contrasted examples, `attracted prospects return'" shares, regarding "is motivated desire consume item purchased." 852-853 300). Forman supports commonsense "financial investments." 853. 11 Concededly, Forman's illustrative description prior appears mistaken exclusive list considering scope "note." But misreading bind ourselves unnecessarily passing dictum frustrate intent all "countless Given position supported neither nor precedents, surprise taken opposite position, done formal adjudications, e. g., re Abbett, Sommer 44 E. 104 (1969) (holding mortgage notes, services repurchase notes event default, contracts); Union Home Loans (Dec. 16, 1982), 26 Docket 1517, 1519 (report order settlement, stating sale promissory secured deeds trust, coupled providing specified percentage investment," contracts), actions, Universal Service Assn., 106 232, 234, 237 (CA7 1939) (accepting SEC's "assured 30% annum chance loss contributor" pertinent substance "`[t]he persons'"); American Trailer Rentals 379 594, 598 (1965) (noting advised" "sale lease-back arrangements," set 2% month years," "were securities" Act). perfunctory contracts. fact bargained mean expected others. Any conclusion conflict itself. 295-296 (service allocation net profits). 14 hold judgment States remanded further proceedings consistent opinion. ordered. Notes: Briefs ofamici curiae urging reversal AARP Stacy Canan, Deborah M. Zuckerman, R. Schuster; North Administrators Association, Mark Davis; Public Investors Arbitration Bar Joseph Long; Regulators Florida et al. Cynthia Maynard. &#x2020; Because ordered complaint dismissed, treat appeal successful motion dismiss accept true allegations complaint. Zandford, 535 813, 818 (2002); Saudi Arabia Nelson, 507 349, 351, 354 (1993).

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