Securities Regulation -- 2004



SEC v. Edwards   (U.S. Supreme Court)

Definition of securities

The Supreme Court 1/13/04 held unanimously that “an investment scheme promising a fixed rate of return can be an ‘investment contract’ and thus a ‘security’ subject to the federal securities laws.” In the case before the Court, investors had purchased payphones from a promoter’s subsidiary and had leased them back to the promoter in exchange for promises of fixed monthly payments. The Court reaffirmed that a contract is an “investment contract” if it “involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” This definition encompasses “the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” The appropriate focus is the promise of “profits” in the form of a financial return – whether fixed or variable – to the investor. The profits to the investor can be expected “to come solely from the efforts of others” even if the promised return is guaranteed by contract and does not depend upon the profitability of the investment scheme as a whole. This decision is important to all businesses engaged in activities that are, or could be, subject to SEC oversight.

 


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