What is a “Security”?

1. What is a “Security”?

2. Security • 1933 Act: § 2(a)(1) “Unless the context otherwise requires” The term "security" means any note, stock, treasury stock, security future, 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, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, 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, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

3. Security • § 2(a)(1) Categories of Securities • Instruments commonly known as securities • a. E.g., stocks, bonds • Instruments specified by the Act to be securities • a. E.g., fractional undivided interest in oil, gas, or other mineral rights • Broad, catch-all phrase “investment contract” • a. Courts determine whether financial instrument is a security

4. Do the SecuritiesLaws Apply?

5. Investment Contract

6. Investment Contract LAND SALESCONTRACT Investors SERVICECONTRACT • SEC v. W.J. Howey Co. W.J. Howey Co. Howey-in-the-Hills Service Inc. InvestmentContract?

7. Investment Contract • SEC v. W.J. Howey Co. THE HOWEY TEST Threshold: contract, transaction or scheme 1. INVEST MONEY 2. COMMON ENTERPRISE 3. EXPECTATION OF PROFITS 4. EFFORTS OF ANOTHER

8. Investment Contract • SEC v. W.J. Howey Co. • 1. Would the offer and sale of tracts of the orange grove – without the additional offering of the service agreement – have been a security? • Invests money? • Common enterprise? • Expectation of profits? • Efforts of another?

9. Investment Contract • SEC v. W.J. Howey Co. • 2. What if the service agreement was offered by an unaffiliated company? Would the service agreement standing alone be a security? • Invests money? • Common enterprise? • Expectation of profits? • Efforts of another?

10. Investment Contract • SEC v. W.J. Howey Co. • 3. Does it matter that the service contracts were optional? • irrelevant; sufficient that Howey“offered” the “essential” ingredients • Different outcome if the land were economically viable without the service contract? 40%? 1%? • - service contract no longer “essential”

11. Investment Contract • SEC v. W.J. Howey Co. • 4. What if the purchasers were wealthy citrus tree company executives who understood the economics of the industry? • Lack of sophistication is not part of the Howey test, except indirectly through the “efforts of another” prong

12. Investment Contract • SEC v. W.J. Howey Co. 5. Is the regulation of the sale of orange groves by the Howey Company what Congress had in mind when it enacted the securities laws?

13. Investment Contract HiWiFi triple power routers • HiWiFi (Hypothetical 2) S. T. O. C. K. SECURITY?

14. Investment Contract • The Howey Test THRESHOLD:contract, transaction or scheme 1. INVEST MONEY 2. COMMON ENTERPRISE 3. EXPECTATION OF PROFITS 4. EFFORTS OF ANOTHER

15. Investment Contract Chicagotruckingfirms compulsory noncontributory • Internat’l B’hood of Teamsters v. Daniel PENSIONPLAN Local 705 Union SECURITY?

16. Investment Contract • Internat’l B’hood of Teamsters v. Daniel • 1. Is there any way to view an employee as making a “choice” with respect to compulsory, noncontributory plans? • employees choose among different jobs • pension plans may be insignificantpart of total compensation package

17. Investment Contract • Internat’l B’hood of Teamsters v. Daniel • 2. Why does the presence of an alternative regulatory scheme influence the determination of whether there is a security? • extension of securities laws wouldserve no general purpose • evidence of regulatory void in securities laws

18. Security • 1933 Act: § 2(a)(1) “Unless the context otherwise requires” The term "security" means any note, stock, treasury stock, security future, 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, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, 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, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

19. Investment Contract • Internat’l B’hood of Teamsters v. Daniel • 3. What sorts of consideration count as “investment” for purposes of theHowey test? • Footnote 12: “This is not to say that aperson’s ‘investment’, in order to meet the definition of an investment contract, must take the form of cash only”

20. Investment Contract HiWiFi triple power routers - or - CASH 50% ofunit value • HiWiFi (Hypothetical 3) PROFIT PARTICIPATIONUNITS value tied to net earnings 25% paid out annuallyon pro rata basis vests by 10% per year(fully vest in 10 years) SECURITY?

21. Investment Contract • The Howey Test THRESHOLD:contract, transaction or scheme 1. INVEST MONEY 2. COMMON ENTERPRISE 3. EXPECTATION OF PROFITS EFFORTS OF ANOTHER