Court Opinion

ID: 9551277
Source: CourtListenerOpinion
Date Created: 2023-08-07 18:50:34.767986+00
Date Added: 2024-06-11T15:23:26.155591
License: Public Domain

*117MR. JUSTICE ERICKSON
dissenting:
I respectfully dissent. The sole issue here is whether a scheme in which an investor’s money and intellectual property are managed, promoted, and marketed by another person, in conjunction with similar services provided to other investors, constitutes a “common enterprise” within the definition of an investment contract enunciated by this court in Lowery v. Ford Hill Investment Co., 192 Colo. 125, 556 P.2d 1201.
It is by now axiomatic that “[i]n searching for the meaning and scope of the word ‘security’ . . . form should be disregarded for substance and the emphasis should be placed on economic reality.” Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). Clearly, the “common enterprise” element of the definition of “investment contract” developed in S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), has no single, fixed analytical content. In enacting the Colorado Securities Act in a form virtually identical to the Uniform Securities Act and the Federal Securities Act of 1933, it is clear that our legislature contemplated the same necessary judicial interpretations which have accompanied the implementation of those authorities. “Common enterprise” has been given broad interpretation by some authorities. See 3 H. Bloomenthal, Securities and Federal Corporate Law § 2.19[ 10] (1975) (authorities cited).
In the present case, each investor’s idea is a more or less distinct invention. When a purchaser buys the patent, the immediate profit is given directly to the investor, with a percentage cut to the Raymond Lee Organization. These factors, viewed alone, would suggest that a common enterprise is not present. However, a realistic view of the particular development scheme offered by the Raymond Lee Organization makes clear that the requisite elements of commonality are present.
In this case, each investor pools his capital to cover not merely the incidentals of office overhead, but the actual development and promotion of his idea. The petitioner uses the funds received from all of the investors to undertake the various promotional and distribution activities which are advertised as the key to successful marketing of the individual ideas. No separate accounting of each investor’s input of capital is made. This common promotion, in the form of massive mailings of all the various ideas to corporations, plus general literature and recommendation letters extolling the value of the enterprise run by the Raymond Lee Organization gives to each investor a value which an agent dealing separately with each idea could not achieve. The numerous ideas are, thus, marketed by a common promotion and distribution device financed by a pooling of capital among the several investors. Thus, as to the very purpose of the enterprise, the several investments are treated as one entity and promoted from one fund. This is clearly distinguishable from the mere “common agent” operating discreet accounts in Milnarik v. M-S Commodities, Inc., 457 F.2d 274 *118(7th Cir.) cert. denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144 (1972). The petitioner’s system of aggregating the capital and ideas of the several investors is what makes the particular promotion scheme a “common enterprise.”
The principal authority upon which the majority relies, Milnarik v. M-S Commodities, Inc., supra, is inapposite to this case. The funds deposited by the several investors in Milnarik were not the basis for a common scheme of promotion — the broker was a common agent, but no more. The pooling of resources was not a critical factor in the profit-making operations of the commodities investment scheme. Moreover, the Milnarik court itself quoted with approval the following “well-reasoned observations” of the trial court in describing the arrangement:
“This characteristic of common enterprise is completely lacking in the present case. Even assuming that Nelson in fact solicited and collected money from numerous parties, no allegations are made that a common enterprise existed comprised of all people possessing discretionary account contracts with him. No claim is made that Nelson traded in a uniform manner for each of these accounts. Even if he had so uniformly traded, no pooling of funds for a common purpose is alleged. Nelson was apparently simply an agent for a number of separate and distinct principals, the plaintiffs being one such principal. The plaintiffs in no way can be viewed as having invested in a common enterprise with other suppliers of venture capital. Without such common investment, the property sale cases are not analogous.” (Emphasis added.)
This excerpt makes clear that the facts of trading in a uniform manner for each account and pooling of funds for a common purpose were absent in that case. In explicitly noting the lack of any “commingling of funds,” the Milnarik court considered the absence of these features significant in reaching its decision. The presence of these factors is undisputed in this case.1
Finally, the mere fact that, once the common promotion scheme produces a sale, the return which an individual investor receives is independent of that of other investors is not dispositive. In S.E.C. v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974), the court stated:
“[T]he fact that an investor’s return is independent of that of other investors in the scheme is not decisive. Rather, the requisite commonality is evidenced by the fact that fortunes of all investors are inextricably tied to the efficacy of the Koscot meetings and guidelines on recruiting prospects and *119consummating a sale.”
Accord, Saur v. Hayes, 36 Colo. App. 190, 539 P.2d 1343 (1975) (approving Koscot analysis); Marshall v. Lamson Bros. & Co., 368 F.Supp. 486 (S.D. Iowa 1974); Huberman v. Denny’s Restaurants, Inc., 337 F.Supp. 1249 (N.D. Cal. 1972); Berman v. Orimex Trading, Inc., 291 F.Supp. 701 (S.D.N.Y. 1968); Maheu v. Reynolds & Co., 282 F.Supp. 423 (S.D.N.Y. 1967); see also S.E.C. v. Continental Commodities Corporation, 497 F.2d 516 (5th Cir. 1974); In re Bestline Products Securities, 412 F.Supp. 732 (S.D. Fla. 1976); 1 L. Loss, Securities Regulation, 489 (2d ed. 1961).
The majority opinion’s interpretation of the common enterprise aspect of the Howey test is too strict. It ignores the Supreme Court’s admonition that the verbal formula “embodies a flexible rather than 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.” S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); Accord, State v. Investor’s Security Corp., 297 Minn. 1, 209 N.W.2d 405 (1973). (“ ‘Common enterprise’ can be no more than an aid to reasoning rather than a strict mechanical test.”).
The core concept behind the phrase “common enterprise” is attention to those aspects of commonality which imply the joinder of multiple investors in a profit-oriented scheme under the management of another. Where the fortunes of the investors as a class rise or fall upon the common managerial efforts of another, the degree of fairness and disclosure exercised by one who solicits such investments is often in need of scrutiny. It is the joint reliance upon the expertise of another and the pooling of an investment fund placed at his disposal that are the hallmarks of a “common enterprise” under established securities law. To engage in technical distinctions designed to draw a line in form where none exists in substance is to defeat the spirit and purpose of the securities statute.2
Finally, the majority opinion ignores an interpretation given to a parallel provision in the Federal Securities Act of 1933. See S.E.C. No-Action Letter, Idea Research and Development, Inc., CCH Fed. Sec. L. *120Rep. ¶ 79,759 (April 8, 1974) (in light of emphasis placed upon return on client’s investment in advertising, development services contract for ideas and inventions was security).
MR. CHIEF JUSTICE PRINGLE and MR. JUSTICE CARRIGAN join me in this dissent.

 It should also be noted that the Milnarik decision has not fared well as precedent. It has repeatedly been distinguished or criticized. See, e.g., S.E.C. v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974): S.E.C. v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974): Marshall v. Lamson Bros. & Co., 368 F. Supp. 486 (S.D. Iowa 1974); Rochkind v. Reynolds Securities, Inc., 388 F.Supp. 254 (D. Md. 1975).

 In advocating a more realistic interpretation of the “common-enterprise” element, I do not suggest that we abandon the casc-by-casc analysis which is basic to this area of the law, In many transactions, such as those involving ticket brokers or airline flight charter agents, several people in effect “pool" their funds so as to allow the individual acquisition of greater value by virtue of greater purchasing power as a group. This form of joint effort is generally not considered to involve a security because the input of money is for a commercial rather than an investment purpose. The delivery of funds to a manager is not based upon the potential success of an enterprise laden with risks, but rather upon the non-speculativc value of aggregate buying power. In these contracts, the investors do not irretrievably “pool” their funds so as to allow the enterprise to go forward, because their investment is generally protected by a provision for return of their money if the deal should fail to go through. Cf., C.N.S. Enterprises, Inc. v. G & G Enterprises, Inc., 508 F.2d 1354 (7th Cir. 1975).