Class 7 defining securities Flashcards
United Housing Foundation v. Forman
Facts:
NY had some opportunities to provide cheaper housing (low mortgage rates) must be non-profit. UHF organized Riverbay to run the co-op. Riverbay sold shares for $25 each. 18 shares for each room of apartment. Non transferrable, tied to living at complex, had to be repurchased by Riverbay at a set price, no dividend. Information bulletin sent out detailing price of rent for living at the complex. Cost overruns led to nearly doubling of price.
I: was the stock a security for securities law? was it stock? was it an investment contract?
H: No, this isn’t stock even though it is called stock. This isn’t an investment contract.
Reasoning: It doesn’t resemble typical equity investments: no dividend
no resale appreciation
No (direct) voting rights
Not transferrable
Just because something is called stock doesn’t mean its stock. Substance over form.
Doesn’t this resemble stock though? What is a co-op? What if dividends were paid from fees from cash flows from common areas (laundry etc)? Are in kind dividends allowed for normal stock? is rent reduction an in-kind dividend?
Avenue Capital Mangagement II, L.P. v. Schaden
Facts: Quiznos was in financial trouble. Avenue and Fortress made large investments. 80% ownership, board representation, control over management
I: were there investment contracts?
Howey: from the efforts of others
H: These weren’t investment contracts
Reasoning: Avenue and fortress had enough control to not make the investment profits from the efforts of the promoter or third party.
Policy: Securities regulations are meant to protect the small, economically distant investor.
Can LLC members have equity interests?
yes
Interests are often represented with _____ that resemble shares in a corporation.
Units
What distinguishes units from shares and why didn’t Avenue argue they had shares?
They did, Avenue and Fortress argued that the interests constituted stock or instruments commonly known as securities.
When is an argument forfeited?
Landreth Timber Company v. Landreth
Facts: Dennis wanted to buy the Landreth’s lumber co. The business had fire damage. The Landreth’s had a large search for a buyer.
I: Was the stock sale covered by securities laws?
H: yes, this is a security.
Reasoning: This is stock. No question about it. Stock is listed explicitly in the definition of security. We don’t need to ask if it is an investment contract.
Aren’t there good policy reasons for excluding small business transactions from securities laws?
Reves v. Earnst & Young
Facts: Agricultural Co-op sold promissory notes. (debt contracts)
Notes were variable interest, uncollateralized. Co-op was not FDIC insured, filed bankruptcy. (hence we are suing the auditors since the co-op has no money, the government wont step in).
I: Were the notes securities?
H: yes
Reasoning: No bright line for debt like with stock. Notes includes too many things. The court adopts the family resemblance test. Presumption of being a security can be rebutted if the note looks like on of the exceptions. Howey test is for something different.
If funds are raised for general purpose and buyer is interested in profit, probably a security. If funds are primarily for short-term liquidity, probably not a security (no consumer or supplier financing)
Is it for wide distribution with trading for speculation or investment? Probably security.
What are the public’s expectation? These beliefs can overcome an economic analysis of the contracts type. Is there another regulatory regime reducing risk. The reduces the need for securities law.
The notes here seem to look like a security, not meeting the exceptions listed.
The fact that demand notes mature immediately doesnt put the notes in the exception for notes maturing in less than nine months. Arkansas stat. of limitation law that says demand notes mature immediately doesn’t apply here.
