Deconstructing the SEC's Cryptocurrency-Suppression Program: Part Four

Footnotes for this article are available at the end of this page.

The Origins of the Enterprise Concept


This is the fourth article in a series that examines how the Securities and Exchange Commission (“SEC”) has expanded its statutorily limited jurisdiction to suppress transactions of digital assets, including cryptocurrencies. Part I provides context for the series and discusses a couple of the SEC’s sleights of hand in initiating its anti-cryptocurrency effort. Part II discusses the SEC’s early involvement with digital assets, and Part III discusses types of digital assets and how utility tokens and currency tokens are not, in our opinion, sufficiently distinct to matter under the SEC’s cryptocurrency suppression program (“Suppression Program”).

In this article, we offer: (1) an historical context for the term “investment contract;” (2) an interpretational history of investment contract; (3) an introduction of the U.S. Supreme Court’s Howey test for what constitutes an investment contract; and (4) an incipient critique of the lower federal courts’ response to the Howey test’s requirement of a “common enterprise.” Reviewing these topics provides the foundation for our next article, Part V in the series, which will expose: (1) how the SEC threw the baby—the “enterprise” of the “common enterprise”—out with the bathwater; (2) how the SEC pasted a new and distorted meaning onto “common enterprise” that has stretched the Securities Act of 1933 (“Securities Act”) out of statutory shape, rendering the registration provisions of the Securities Act irrelevant; (3) what the Howey Court meant when it used the term “common enterprise” as a definitional element of “investment contract;” (4) how that meaning differs radically from the SEC’s newly-affixed meaning; and (5) how the Supreme Court’s original test from Howey fits perfectly into the registration provisions of the Securities Act—and how that test excludes most digital assets, including cryptocurrencies, from registration under the Securities Act.

The SEC’s Position on Digital Assets

As a quick review, the SEC’s position on digital assets can be summarized through six premises, the fifth and sixth of which are problematic: (1) the SEC has jurisdiction over the offer or sale of a “security”; (2) the Securities Act requires that a security be registered with the SEC before being offered and sold, unless it or the transaction in which it is offered or sold is exempted; (3) a “security” is defined in the Securities Act and the Securities Exchange Act of 1934 (“Exchange Act”) and includes standard types, such as stocks and bonds, and at least one non-standard type, the “investment contract;” (4) the Supreme Court, in Howey, formulated a test consisting of several conditions that must be satisfied before identifying a non-security as a non-standard security, that is, an “investment contract” (the “Howey Test”); (5) the SEC considers a digital asset, what we call private digital money (“PDM”), to be an investment contract for reasons stated in documents promoting this stance and as evidenced through its Enforcement activities, including administrative proceedings, settled matters, and legal actions against digital-asset producers; and (6) the SEC insists that such digital assets be registered under the Securities Act.

The Catch-22 for Digital-Asset Producers

The problem with the SEC’s position is that it is disingenuous, both in the claim that many digital assets are a security and the insistence that digital assets be registered as securities. In Part I, we suggested that digital-asset producers are in a Catch-22: if these companies do not register their digital tokens with the SEC’s Division of Corporation Finance, which processes securities registrations, the SEC’s Division of Enforcement closes down operations, leaving token-holders with losses, ostensibly for their “protection.” If the digital asset-producers attempt to register their tokens, they fail. As noted in Part I, we are unaware of any digital-asset producer’s successful registration of tokens that are not treated as either a liability or as equity in the amount of the proceeds received from token sales. This financial treatment makes such tokens, by definition, security tokens. In other words, if the token sales do not appear as line items on the right-hand side of the horizontal balance sheet, which reflects direct or indirect claims against the issuer, then they are not capable of being registered.

We suspect that the registration failure occurs after a digital asset producer candidly presents its tokens as operating products and not as financing products, which means that they are not securities and cannot be registered as such.3  If we are correct in this supposition, it follows that the SEC holds a schizoid, internally inconsistent view of the definition of an investment contract-type “security” as applied to digital assets, and this enables the SEC effectively and completely to suppress cryptocurrencies.4  We also suggest that the SEC is acting in the service of the profits to large banking enterprises, specifically, to prevent these businesses from being “disintermediated” from customer deposit amounts5  and from merchant transactions facilitated by Visa6  and MasterCard.7

The Investment Contract

States were the first jurisdictions, beginning with Kansas in 1911, to enact security-registration laws and to include the term “investment contract” among the list of types of securities regulated.8  These statutes required that those offering and selling securities register with the state at the risk of civil or criminal prosecution, and some states authorized administrators to determine the merits of the proposed investment (hence the term “blue sky” laws). States were also the first jurisdictions, beginning in 1920, to give a judicial definition for “investment contract.” When the federal Securities Act became effective in 1933, state securities laws—commonly called the “Blue Sky Laws”—had been constitutionally tested9  and in effect for over two decades.

State Courts and “Investment Contract”

Minnesota’s high court became the first, as far as we have been able to ascertain, to give a judicial definition for “investment contract” in State v. Gopher Tire & Rubber Co.10  In that case, the Minnesota Supreme Court affirmed the indictment of a tire company for having issued and sold securities without the license required by Minnesota’s Blue Sky Law. The Court addressed several certified questions, including the jurisdictional question of whether the company-issued certificate to which the indictment referred should be “construed as a stock, bond, ‘investment contract,’ or other security of the defendant company.” The certificate stated that a holder who paid the company $50 and promised to assist in selling the company’s products would receive 10% of the local dealer’s profits, divided pro-rata among certificate holders residing in the specified location, and a portion of the company’s “excess earnings,” which would be set aside as a bonus reserve for all certificate holders.

Noting that “[n]o case has been brought to our attention defining the term, ‘investment contract,’” the court found the certificate to be an investment contract. The court noted that the $50 payment was capital for the company’s use and an investment to the payer, who justly expected “income or profit from the investment.”11  The company, as the court observed, sought “to obtain capital . . . without issuing stock,” and although the certificates were “like stock in that they gave their holders the right to share in the profits of the corporation . . . their holders get no interest in the tangible assets of the corporation.”12  Minnesota’s Blue Sky Law, according to the court, was intended “to put a stop to the sale of shares in visionary oil wells, nonexistent gold mines, and other ‘get-rich-quick’ schemes calculated to despoil credulous individuals of their savings.”13

Splitting the Investment

Only the limits of human ingenuity form the boundaries of potential frauds and scams. Profits from the business of stealing others’ savings warranted the intellectual effort, likely including the assistance of attorneys, of hiding the investment contract in an array of methods devised to avoid the reach of Blue Sky Laws.14  One resulting strategy was to split the “investment” by using two contracts to cover a single transaction.

To appreciate this maneuver, we define investment as a property interest in an asset that promises (a) the potential return of the purchase price and (b) a profit in addition. The property interest can be full or partial. The asset may be productive or not productive, as with collectibles, and the productive asset may be a business enterprise or a non-enterprise item, such as manufacturing equipment.

The more intuitive productive asset is the non-enterprise productive asset; either the machinery or what we can call a gain-generating asset, such as a collectible. The former makes products that can be sold at a profit; the latter generates a gain (or profit, broadly) upon resale in a secondary market that values the asset for its utility, collectability, or both. It may be realty, unimproved or improved, currency for exchange, or a collectible, such as a painting, classic automobile, baseball card, stamp, coin, and so on. In either situation, the investment is primarily passive; that is, the investor is not the primary agent in the asset’s increase in value.

The less intuitive asset is the business enterprise, which holds its own assets, including productive assets and gain-generating assets.15  It consists of: (1) a set of productive assets or gain-producing assets or both; (2) the aspiration to become increasingly profitable; (3) an arrangement as a legal or non-legal organization; (4) a set of business activities, which include financing, investing, and operating activities; (5) a set of agents, including employees (managers and operators) and independent contractors to engage in the business activities, including networking with financiers, sellers of productive assets, suppliers, and so on; and (6) the resulting products. The potential profit on the enterprise comes from and through the enterprise’s productive assets or gain-generating assets and business transactions with customers.

Because the asset being acquired through an investment contract is a business enterprise that holds its own productive assets, one can split the business enterprise, as an asset, from the productive assets the enterprise holds, and then contract to sell, in the first contract, the productive asset to the investor, item (1) above, and in the second contract, the “remainder” of the business enterprise, which includes everything from (2) through (6), inclusive. This splitting enabled schemers to claim that they simply sold a property interest in a standalone, productive product, not a property interest in a business enterprise that could generate a profit for the purchaser whose participation was more or less passive.

The Business Enterprise

The Securities Act was the federal version of the Blue Sky Laws, but its provisions did not authorize administrative evaluation of the “merits” of a proposed securities offering as some states’ Blue Sky Laws allowed. Congress appropriated the term “investment contract” from the states that had enacted their own securities laws. Most terms listed as constituting a “security” in the Securities Act and Exchange Act are traditionally recognized, being either the name of the particular security or the name of the document that evidences that particular security.16  A term appearing in both lists is considered to have the same or similar meaning.17  If the name given to an item bought and sold is among the terms listed under “security” and bears the “usual characteristics of that security, ‘a purchaser justifiably [may] assume that the federal securities laws apply.’”18

In its Annual Report for 1944, the SEC noted that “[s]ales of securities have been disguised and camouflaged so as to appear to be simple sales of real or personal property.”19  The SEC and the courts, not allowing the transactional form to hide the underlying financial reality, undid the splitting and recombined the two contracts and buyers’ interests to find the single “sale of a security.”20  Combining the contracts revealed that the investment was not merely a gain-generating asset, such as land, which could be resold on a secondary market for a possible gain, but a productive business enterprise from which profits could directly come to the investor independently of any secondary market.

Thus, for instance, the sale of an asset in an initial contract [Contract #1] is “[c]oupled with . . . an oral or written understanding that the property sold is to remain in the possession and control of the promoter [Contract #2] who is to distribute the profits to the purchaser.”21  The consequence of recombining the contracts revealed the true investment to be in the business enterprise as an asset:

[W]here a purchaser has no intention of assuming any control of the property purchased, but is really buying only an interest in a business enterprise and looks solely to the efforts of the promoter to earn a profit for him, the courts have sustained the Commission’s position that the substance controls the form and that there is involved the sale of a security and in the use of misrepresentations and fraudulent schemes an injunction should be issued.22

The Enterprise Tests

In defining security by listing examples, Congress did not abstract from common, well-known examples to create a universal definition of “security” that could be applied to both the common and the yet-to-be-invented, uncommon security. It left the costs of identifying specific instances of an investment contract to litigants and the federal judiciary on a case-by-case basis, which created uncertainty—and opportunity. This opportunity enabled the use of the splitting device in extraction-business (oil, gas, and minerals) schemes and farming-business (grove) schemes.23  This ad hoc approach was inefficient and capable of generating different standards and results,24  which is why a useful legal test was needed.25

In 1943 and 1946, the U.S. Supreme Court twice addressed the problem of the investment contract: the first case involved a mining scheme, and the second, handed down only three years later, involved a grove-development scheme. As we will see, the opinion from the first case did not generate a usable legal test, but the opinion in the second created a test that has stood for three-quarters of a century.

The Exploration Enterprise

In its first investment contract decision,26  the U.S. Supreme Court reversed the two lower courts’ finding of no security—but fraud—and remanded the matter to the U.S. district court to grant the SEC injunctive relief against the non-settling defendants, C. M. Joiner Leasing Corp. (“Corporation”), which bought and sold oil and gas leases and developed oil and gas properties in Texas, and its namesake principal and one of its four owners, C. M. Joiner (“Joiner”).

Around 1940, the owner of a large tract of land in Texas granted a driller, A. L. Anthony, an oil and gas lease to 4,700 acres in exchange for Anthony’s promise to drill a test well. Anthony, in turn, assigned 3,000 of his leased acres to the Corporation if the latter would pay to drill the test well. Not having sufficient funds, the Corporation created a mail campaign to sell leases to small tracts from its 3,000 acres, ranging from 2.5 to 20 acres for $5 to $15 per acre. The literature assured the prospective buyer that the Corporation would drill a test well to determine if oil might be found in the leasehold, and emphasized that the buyer was making an investment and participating in an enterprise. Apparently using proceeds from the small leases, the Corporation was hired to drill a 2,000-foot well (or less, if oil was found), at $2.50 per foot, on the 3,000 acres.27  Anthony only drilled down 1,375 feet, found no oil or gas, and, in December 1941, abandoned the well.

The district court found that this arrangement did not involve the sale of a security, and the SEC appealed to the Fifth Circuit, where two of three judges affirmed the district court. The court reasoned that, because Section 2(1) of the Securities Act specified that a “fractional undivided interest in oil, gas, or other mineral rights” is a type of security, one can infer that a fractional divided interest must not be a security. No mention was made in the majority opinion of the investment contract possibility, but the court noted that even if the Corporation and Joiner had represented that the well would be drilled—which it was not—the obligations to drill did not “serve to give purchasers a greater right or interest in their tracts than as stated.”28  The dissenting judge, however, noted that the leases were coupled with an implied contract to drill an exploratory well, creating an investment contract.29

The Supreme Court took the case and, in validating the Fifth Circuit dissent’s use of the investment contract model, held that the transactions, as the advertising clarified, involved an “exploration enterprise.”30  This enterprise was “woven into the leaseholds, in both an economic and a legal sense,” as “the undertaking to drill a well runs through the whole transaction as the thread on which everybody’s beads were strung.”31  To the Court, “an economic interest in this well-drilling undertaking was what brought into being the instruments that defendants were selling and gave to the instruments most of their value and all of their lure.”32  The Court found that purchasers had entered into a contract, “in which payments were timed and contingent upon completion of the well and therefore a form of investment contract in which the purchaser was paying both for a lease and a development project,” thus an exploration enterprise funded by a portion of each per-acre lease price.33

The Court’s legal test required examination of the “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.”34  This test, however, is vague and is and was of little practical utility. Moreover, the Court did not reveal how it could even be used to determine that the purchasers had obtained property interests in an exploration enterprise. The Court’s holding did not provide needed clarity for anyone, and the Court revisited the very same question only three years later, in SEC v. W. J. Howey Co.35

The Common Enterprise

In addition to selling the dream of finding oil and precious metals hidden in Mother Earth, schemers also offered and sold grove-development and various “farming” opportunities. In the early 1940s, the SEC filed at least three actions against grove developers, the first two concerned tung-tree groves, one in Mississippi and another in Florida, and the last, a citrus grove in Florida.36  In the first case, SEC v. Tung Corp. of America,37  the SEC sought to enforce an outstanding subpoena against Tung Corporation of America (“Tung Corp.”), which claimed that it had not sold securities and the SEC lacked jurisdiction.

The facts revealed the standard split: Tung Corp. held land with tung trees38  in Mississippi, which it sold in small tracts to purchasers under one contract, followed by a second service contract. The service agreement had two variants, both of which had the purchaser lease the land back to the corporation for 30 years, during which it would act as exclusive manager and agent in caring for the trees and harvesting and marketing the produce for 30 years. Under the service agreements, the purchaser gave the corporation three years’ use of land between tree rows to grow and sell its own crops; one required the corporation to pay the grantee, and the other did not. After the third year, the grantees would pay an annually escalating service fee per acre that capped at $7.50 per year.39

Tung Corp. argued that it had only sold land; the services were separate, but the district court disagreed, noting that “[t]he contract is of the nature of a profit-sharing contract which continues in force for a period of many years.”40  The court noted that:

no case involving contracts exactly like the present one can be found in the books (the ingenuity of corporations and salesmen in devising forms to evade the provisions of ‘blue sky‘ laws seems to be limitless) the courts have not been hesitant in looking through the form to discover the real nature of the transaction.41

In sum, the court found the complete transaction to “certainly” be an investment contract.42

The matter of SEC v. Bailey43  presented the same basic scenario as in Tung Corp., but it involved two sets of individual and corporate defendants with the important twist that each set of defendants used a different corporation for each of the contracts. Each had a land-owning company that held large tracts of land in Florida. These companies sold 10-acre and 20-acre tracts, again, for the development of tung-tree groves. Each principal also owned a grove-development company that offered tract-purchasers a four-year service agreement to plant and cultivate tung trees on their lots. After four years, when the tree would begin producing tung nuts, the tract-purchasers could renew the four-year agreement with the services now, including harvesting, marketing, and profit-distributing.44

The court defined securities as “evidences of obligations to pay money, or a right to participate in the earnings or distribution of property.”45  An “investment contract” is a contract that

contemplates the entrusting of money or other capital to another, with the expectation of deriving a profit or income therefrom, to be created through the efforts of other persons. Otherwise stated, it is a contract providing for the investment or laying out of capital in a way intended to secure income or profit from its employment, which will arise through the activities and management of others than the owner.46

Despite a purchaser’s execution of two contracts, one to purchase land from a land company and the other to purchase development services from a development company, the question is the “real nature of the transaction.” The “[s]eparability of ownership” of the productive assets, the tracts of land on which the trees existed or would be grown, did “not deprive the transaction of the character of an investment contract.”47  The court noted that these tracts were usually within “a common fence surrounding a larger area owned by the defendants, or by other purchasers,” and they effectively constituted the developer’s common enterprise or “plantation,” which made the purchaser “a unit holder in an extensive development enterprise.”48  Applying its definition to the facts of the case, the district court granted the SEC a preliminary injunction against the defendants.

In SEC v. W.J. Howey Co.,49  the SEC sought an injunction against defendants whose business model was identical to that in Bailey, the difference being the type of trees—orange instead of tung. The land company that held and sold citrus acreage was W. J. Howey Co., and the company that serviced the land was Howey-in-the-Hills Service Inc. Both were Florida corporations under common control and ownership. W. J. Howey Co. planted and maintained one half of the citrus grove for itself and offered the other half to the public to finance the growth of its ownings. The purchasers of land were not obligated to enter into the development contract with Howey-in-the Hills Service Inc., but were free to not develop the land or to retain another service company. The service contract with the related development company was for ten years and required the grantee to lease back to the service company the land just purchased. Howey-in-the-Hills harvested the oranges and pooled all fruit, mixing the Howey Company’s produce with that produced on the investors’ tracts, sold it, and allocated and remitted the net profits according to acreage.50

Although the Supreme Court had recently decided C.M. Joiner, which offered a fairly broad definition of investment contract, the district court and court of appeals in Howey found no investment contract and denied the SEC the relief sought.51  The Supreme Court reversed and held that “under the circumstances, the land sales contract, the warranty deed and the service contract together constitute an ‘investment contract.’” The Court rejected the court of appeals’ requirement of a speculative enterprise and its suggestion that the sale of an asset with its own “intrinsic value” took the transaction outside the scope of “investment contract.” The Court stated that “[t]he test is whether the scheme involves an investment of money in a common enterprise with profits to come from the efforts of others.”52

In a dissent, Justice Frankfurter identified the critical question in the case to be “whether the contracts for the land and the contracts for the management of the property were, in reality, separate agreements or merely parts of a single transaction.”53  This question was one of fact, not one in which the facts were such that the answer to the question was so indisputable that the question was one of law. Given that the district court had found that each contract was with a separate company and in a separate contract and not required to enter into two contracts, Frankfurter believed that the Supreme Court should honor the district court’s finding that the contracts were not part of a single transaction.54

Thus, the Supreme Court set forth specific, necessary conditions that must be met for an arrangement to be considered an investment contract-type security. The condition of a common enterprise, enunciated in Howey, narrowed the broader definition of investment contract, which had proved difficult for the federal courts in its application.55


After Howey, the federal courts focused on the meaning of the adjective–“common”—at the expense of the noun that it modifies—“enterprise.” An “enterprise” is essential to the notion of a security generally and investment contract specifically, but the courts have never defined enterprise while developing tests for “commonality.” This is what we call the “inverted analysis.”

In Part V of this series, we will discuss: (1) how the SEC has exploited the inverted analysis to expand the meaning of “enterprise” in the several documents it generated from 2017 to 2019 in support of its digital asset Suppression Program and its district court complaints and orders instituting administrative proceedings; (2) what the Howey court meant—and had to have meant in light of the registration requirements of the Securities Act—by “common enterprise;” and (3) how the SEC’s new meaning for “enterprise” is inconsistent with the Howey test, the very meaning of “security,” and the Securities Act, and reflects an unwarranted expansion of administrative reach.


[1] See SEC v. W. J. Howey Co., 328 U.S. 293 (1946).

[2] We note here that the SEC’s Division of Corporation Finance did provide a “no-action letter” response to IMVU, Inc., in connection with IMVU’s proposed sale and distribution of “VCOIN,” which came with a number of very restrictive conditions attached, including a commitment to issue an unlimited amount of VCOIN to ensure that the market value of the asset would never exceed a set amount ($0.004 per token). SEC, IMVU, Inc.: Response of the Division of Corporation Finance (Nov. 19, 2020),

[3]  The Division of Corporation Finance may not consider these digital assets to be securities for a number of reasons that we will provide.

[4] In remarks given in June 2018, then-director of the SEC’s Division of Corporation Finance, William Hinman, said:

I believe that some industry participants are beginning to realize that, in some circumstances, it might be easier to start a blockchain-based enterprise in a more conventional way. In other words, conduct the initial funding through a registered or exempt equity or debt offering and, once the network is up and running, distribute or offer blockchain-based tokens or coins to participants who need the functionality the network and the digital assets offer. This allows the tokens or coins to be structured and offered in a way where it is evident that purchasers are not making an investment in the development of the enterprise.

William Hinman, SEC, Director, Division of Corporation Finance, Speech, Remarks at the Yahoo Finance All Markets Summit: Crypto, Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018),

[5] See Part I in this series, at text accompanying notes 2-4,

[6]  For fiscal year ended June 30, 2020, Visa processed transactions totaling $11.3 trillion, from which it generated revenue of $21.8 billion and net income of $10.9 billion. Visa, Inc., Annual Report 2020, at 2 (Nov. 19, 2020),

[7] For fiscal year ended December 31, 2020, MasterCard processed transactions totaling $6.3 trillion, from which it generated revenue of $15.3 billion and net income of $6.4 billion. Mastercard Inc., Annual Report on Form 10-K, at 6 (Feb. 12, 2021),

[8] See, e.g., Jonathan R. Macey & Geoffrey P. Miller, Origin of the Blue Sky Laws, 70 Tex. L. Rev. 347, 354 n.27, 355 & 357-58 (Dec. 1991) (hereafter, “OBSL”). This article offers a compelling explanation of the origins of state “blue sky” laws. The authors argue that high inflation and interest rates increased investments in new, high-return businesses. Deposits and savings moved to speculative enterprises, creating competition that banks did not appreciate. In agricultural states lacking significant manufacturing, disintermediation of local banks reduced credit to local businesses and farmers, but securities regulations could “suppress competition for depositors’ funds” and prevent the “outflow of money and credit from the state.”

[9] In 1917, the Supreme Court released the Blue Sky Cases, which upheld state securities-regulation laws against constitutional challenges: Hall v. Geiger-Jones Co., 242 U.S. 539 (Ohio); Caldwell v. Sioux Falls Stock Yards Co., 242 U.S. 559 (1917) (South Dakota); and Merrick v. Halsey & Co., 242 U.S. 568 (1917) (Michigan).

[10] 177 N.W. 937 (Minn. 1920).

[11]  Id. at 938.

[12]  Id. The court also noted that “[t]he statute makes specific mention of stock, which, properly speaking, is not a security.” This statement reflects a different and narrower view of a security, and it may be based on the role of legal capital for creditors. The par value or stated value of stock issued and outstanding is the minimum price at which it can be sold or redeemed and is “legal capital,” that is, it is contributed capital that cannot be distributed as a dividend to stockholders. Par values are now so low or nonexistent that any reserve of capital for creditors is negligible. When par values were higher, however, the reserve did provide some “security” for the creditor; currently, loan covenants have replaced this function of legal capital.

[13] Id.

[14] “‘The ingenuity and fertility of resources of those dealers in securities who deliberately attempted to avoid’ the application of the state blue-sky laws to their schemes ‘supplied the background of experience against which [the federal Securities Act] was written and has been administered.” SEC v. Timetrust, Inc., 28 F. Supp. 34, 39 (N.D. Cal. 1939) (quoting SEC v. Crude Oil Corp., 93 F.2d 844, 847 (7th Cir. 1939)).

[15] The business enterprise, as a profit-generating asset, is a capital asset, which is the subject of the capital asset pricing model. It may hold revenue-producing assets in its portfolio that make the business an asset. If the business enterprise is a pooled asset vehicle, it can hold real estate, securities, or any other asset in its portfolio that may increase in value. If it is an operating company, it can hold, by ownership or lease, income-producing assets such as manufacturing equipment or commercial jets.

[16] The U.S. Supreme Court has observed that the lists capture “the many types of instruments that, in our commercial world, fall within the ordinary concept of a security.” Marine Bank v. Weaver, 455 U.S. 551, 555-556 (1982).

[17] See, id. at 555 n.3 (“We have consistently held that the definition of ‘security’ in the 1934 Act is essentially the same as the definition of ‘security’ in . . . the Securities Act of 1933 . . . .”) (statutory citation omitted.); Tcherepnin v. Knight, 389 U.S. 332, 335-36 (1967) (“The Securities Act of 1933 . . . contains a definition of security virtually identical to that contained in the 1934 Act. Consequently, we are aided in our task by our prior decisions which have considered the meaning of security under the 1933 Act.”) (statutory citation omitted.).

[18] Landreth Timber Co. v. Landreth, 471 U.S. 681, 686, 691 (1985) (noting that “the Howey economic reality test was designed to determine whether a particular instrument is an ‘investment contract,’ not whether it fits within any of the examples listed in the statutory definition of ‘security.’”) (emphasis in original.).

[19] SEC, Tenth Annual Report, at 10 (Apr. 21, 1945),

[20] Id.

[21] Id.

[22] Id.

[23] OBSL, supra note 8, at 353.

[24] One U.S. district court observed the absence of any legal test and noted (correctly) that this was a consequence of courts’ refusal “to lay down a hard and fast rule as to what constitutes a security.” SEC v. Timetrust, Inc., 28 F. Supp. 34, 38 (N.D. Cal. 1939) (citing to State v. Whitaker, 247 P. 1077, 1979 (Or. 1926)). The courts’ refusal, in turn, was based on the difficulty of constructing such a test: “It is better to determine in each instance whether a security is in fact of such a character as fairly to fall within the scope of the statute.” Id. (quoting State v. Gopher Tire & Rubber Co., 177 N.W. 937, 938 (Minn. 1920)).

[25] Legal tests are conditional statements designed to simplify and clarify rules derived from statutes or common law, which are of the form: If x, then y.  A legal test is of this form, too, as it lists necessary or sufficient conditions or requirements that, if satisfied, require a specific outcome. Thus, if x1, x2, and x3, then y. If not satisfied, the outcome is the default category, not y. Although the objective of a legal test is to simplify and clarify conditions and consequential outcomes, one or more of the legal test’s conditions may itself be confusing and require further clarification. This can generate another test—a sub-test—that may (or may not) clarify that specific condition but at the expense of simplifying.

[26] SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943).

[27] Id. SEC v. C. M. Joiner Leasing Corp., 133 F.2d 241, 245 (5th Cir. 1943). Our recitation of the facts combines the facts found in the opinions of the Fifth Circuit and the U.S. Supreme Court.

[28] 133 F.2d at 245.

[29] Id. at 246-47 (Hutcheson, C. J., dissenting).

[30] 320 U.S. at 348. The Supreme Court rejected the two statutory-construction arguments concerning the list-definition of “security” in the Securities Act, which the majority of the Fifth Circuit panel seemed to accept. Defendants argued that: (1) the inference from the maxim expressio unius est exclusio alterius (the expression of one is the exclusion of the other) applied, and Congress’s inclusion of “undivided fractional interest” in the list of types of security excluded a “divided fractional interest” from that list; and (2) the inference from the maxim ejusdem generis (of the same kind) also applied, and Congress’s placement of “investment contract” immediately after specific and common forms of security constricted its meaning. Id. at 350.

[31] Id. at 348. The Court noted that the Fifth Circuit’s dissenting opinion suggested that “the assignee acquired a legal right to compel the drilling of the test well,” which was a state-law question and did not require resolution. Id. at 349.

[32] Id. at 349.

[33] Id. The Court also noted that the SEC had the burden of proving that “documents being sold were securities under the Act.” In cases where the instrument does not reveal itself to be a standard security, evidence “must go outside the instrument itself” and must show, by a preponderance of the evidence, its status as a security. Id. at 355.

[34] Id. at 352-53. Importantly, the Court noted that in applying the Securities Act, “it is not inappropriate that promoters’ offerings be judged by what they were represented to be.” Id. at 353. In effect, the “reality” for purposes of addressing what was offered and sold is the reality the promoters represent to purchasers; these promoters cannot then argue that because they misstated the truth—engaged in fraud—no security existed and no jurisdiction attaches.

[35] 328 U.S. 293 (1946).

[36] In the history book of American swindling, Florida’s century of land scams requires its own chapter. See, e.g., Hubert B. Stroud & William M. Spikowski, Planning in the Wake of Florida Land Scams, J. of Planning Ed. & Res. (Assoc. of Coll. Schs. of Planning 1998),

[37] 32 F. Supp. 371 (N.D. Ill. 1940).

[38] The tung oil tree, native to China and Vietnam, is a plant with toxic leaves, nuts, and seeds; a leaf can leave a rash, and a single seed can be lethal. Its oils, however, have been “used in the manufacture of lacquers, varnishes, paints, linoleum, oilcloth, resins, artificial leather, felt-base floor coverings, and greases, brake-linings and in clearing and polishing compounds.” University of Florida, Center for Aquatic and Invasive Plants, Vernica fordii, The website,, notes that tung oil’s “importance was such at one time that it was declared a strategic defense item prior to WWII.”

[39] 32 F. Supp., at 373.

[40] Id. at 374.

[41] Id.

[42] Id.

[43] 41 F. Supp. 647 (S.D. Fla. 1941).

[44] Id. at 648-49.

[45] Id. at 650 (citing Oklahoma-Texas Trust v SEC, 100 F.2d 888 (10th Cir. 1939)).

[46] Id. (citing SEC v. Universal Service Ass’n, 106 F.2d 232, 237 (7th Cir. 1939) and Minnesota v. Evans, 191 N.W. 425 (Minn. 1922)).

[47] Id.

[48] Id. at 649.

[49] 328 U.S. 293 (1946).

[50] Id. at 295-96.

[51] Id. at 294.

[52] Id. at 301.

[53] Id. at 302.

[54] Id.

[55] See, e.g., Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230, 239 (2d Cir. 1985) (“In W.J. Howey Co., the Supreme Court narrowed the Joiner “character in commerce” test, stating specific requirements that continue to be the analytical foundation for determining what constitutes an investment contract.”