Original | Odaily Planet Daily

Author | jk

In recent days, law professors from Yale University, the University of Chicago, UCLA, Fordham University, Boston University and Widener University filed an amicus curiae opinion that retrospectively traces the "investment contract" The history of the term's meaning before, during, and after the passage of the Federal Securities Act in 1933 completely refuted the SEC's "investment contract" theory.

Here are the scholars' conclusions:

• "In 1933, state courts agreed on how to interpret the term 'investment contract' as a contractual arrangement that entitles an investor to take a share in the seller's subsequent income, profits, or assets. share in the contract."
• After the Howey decision in 1946, "[the] common feature [of investment contracts] remains that...by virtue of its investment, the investor must be promised a continuing contractual interest in the revenues, profits, or assets of the business."
• "Every 'investment contract' identified by the Supreme Court involves a contractual promise to confer a continuing interest in a business."

@MetaLawMan on Twitter said: In my opinion, **this amicus curiae opinion dealt the fatal blow to the SEC's argument that cryptocurrencies traded in secondary markets are investment contracts. **

Background: "Blue-Sky Laws"

When Congress included the term "investment contract" in the definition of "securities," the term had a clear meaning in Blue-Sky Laws, requiring contracts to promise future value.

By the time Congress adopted the Securities Act and the Exchange Act, nearly every state had passed state laws regulating securities trading. In defining a set of national standards and federal regulatory programs, Congress chose to create federal laws based on these so-called "blue sky laws." Most pertinently, Congress imported the term "investment contract" en masse from these blue sky laws in defining what "securities" are covered by the new state securities laws.

With this background, we review the development of the concept of "investment contracts" under the Blue Sky Act cited by Howey as the basis for the definition of the term "uniform".

In the early 20th century, some states in the United States began to enact the first batch of "blue sky laws".

At the turn of the 19th century, as the U.S. economy boomed, so did the market for trading shares in U.S. businesses. Opportunities to invest in blue-chip stocks have grown as middle-class and retail investors flock to the big exchanges in New York and San Francisco to buy stakes in business ventures of industrial giants from railroads to heavy industry. But at the same time, there has been a rise in speculative or downright fraudulent investment opportunities from dubious sellers, such as "flash in the pan companies, fantasy oil wells, distant gold mines and other similar fraudulent developments." Unlike their blue-chip relatives, these investment opportunities are often sold in person, in newspapers, and even by mass mail. Unsurprisingly, the marketing of these investment opportunities is often tinged with clever "blowing" and fraud.

Beginning in 1910, state legislatures responded to these developments by enacting the nation's first securities laws. These initial legislative efforts are aimed at protecting the public from "dishonest salesmen selling shares under blue skies."

The first "blue sky laws" were relatively simple and did not specify the tools they covered. For example, Kansas' 1911 securities law has been hailed as the first "blue sky law." It simply requires investment firms to register "any stocks, bonds or other securities of any kind or nature" before they can sell them.

Other states have attempted to provide some clarification on what is considered a "securities." **For example, California and Wisconsin's initial statutes clearly state that "securities" means traditional instruments such as "stocks, stock certificates, bonds, and other evidence of indebtedness." **

Lawmakers quickly saw the need for a second-generation securities law. In fact, the bad, speculative, or fraudulent investment deals or schemes that sparked the enactment of the first "blue sky laws" weren't technically stocks or bonds. These deals, masquerading as traditional shares, propose to give investors, in exchange for an initial amount, a contractual right to the future value of a business, much like stocks or bonds. And, given that these laws focus on real stocks and bonds, these fake stocks and bonds are clearly exempt from the first generation of blue sky laws.

Subsequently, these states expanded the "blue sky law" to include "investment contracts", which included the new form of stocks and bonds.

To explicitly align these new instruments or proposals, which share key economic and legal characteristics with stocks and bonds, state legislatures sought to explicitly align and regulate them in second-generation securities laws.

Minnesota added the term "investment contract" to its definition of "securities" in its Blue Sky Act of 1919. The new, undefined term is intended to capture those investments, while not formally stocks or bonds, but are contingent upon and given a contractual right to future profits. Other states soon followed suit, adding "investment contracts" to the list of instruments covered by their "blue sky laws."

Minnesota Interprets Term "Investment Contract" in Gopher Tire Case

Although, as mentioned above, the term "investment contract" is not defined in the law itself, the court quickly gave a definition based on the intention and background of the adoption of this statutory term in the Blue Sky Law. In several earlier Minnesota cases, including the one cited by the Supreme Court in Howey, 328 US 298 & n. ". These rulings are considered authoritative interpretations of the original meaning of the term.

In Gopher Tire, a local tire dealer sold "credentials" of its business to investors. Gopher Tire, 177 NW 937-38. Under the agreement, investors will pay $50 and agree to promote the dealer's merchandise to others. In exchange, investors receive a "voucher" that gives them a contractual "right" to receive a percentage of the dealership's profits. Parsing the definition of "securities" in the Blue Sky Act, the court ruled that the certificates were not technically or formally "stock." Even so, the Minnesota Supreme Court ruled that the certificates "can properly be considered investment contracts." ** In making this determination, the Court reasoned and emphasized that these certificates share the same key feature as shares, namely that the investor provides "funds" to the dealership in return for the investor contractually receiving a "share in the company's profits" "s right. **

Other early Minnesota cases followed this early judicial test to define statutory terms. In Bushard, the Minnesota Supreme Court faced another dispute over whether a contractual profit-sharing arrangement was an investment contract. Here, a bus driver pays the bus company $1000, and in return receives a "contract" promising the driver a salary plus a share of the bus company's profits (in addition to "eventually returning" his $1000 "investment") . Following the Gopher Tire ruling,** the court ruled that the arrangement was an "investment contract" based on two key elements: the driver (i) "invested for profit" and (ii) in exchange, received A "contract" ("operator agreement") securing an interest in the future profits of the business. **

In summary, early Minnesota cases revolved around two statutory terms: "contract" and "investment." An arrangement is considered an investment contract if: (i) the investor receives a contractual commitment in another person’s business enterprise, and (ii) in exchange for the “investment” the investor is Commitment to share rights in future revenue, profits, or assets of a business.

**By the time the Securities Act and the Exchange Act were adopted, the term "investment contract" had a defined meaning. **

By 1933, when the Securities Act was enacted, 47 of the 48 states had passed their own blue sky laws, many of which involved "investment contracts" (following Minnesota's lead). Moreover, when state courts applied the term "investment contract" to various arrangements in the decades leading up to 1933, they agreed on a uniform meaning. As Howey explained, that's the meaning Congress adopted.

In short, by 1933, state courts had reached a consensus on how to interpret the term investment contract as a contractual arrangement that entitles the investor to take part in the seller's subsequent revenue, profits, or A contractual share of the asset. Indeed, to the best of our knowledge, no state court decision appears to have found an investment contract in the absence of these key features. In some decisions, such as Heath, the courts openly proposed that an "investment contract" required an actual contract. In other decisions, courts have emphasized the seller's obligation to pay (and the holder's right to receive) a portion of its future value in exchange for the initial capital outlay. Courts typically rely on this requirement to distinguish bona fide investment contracts from basic asset sales.

The "investment contract" since the Howey judgment

In the more than 75 years since the Howey decision, courts have applied the Supreme Court's deceptively simple test to all novel and complex business situations, producing a complex web of precedent. The common thread remains -- as state courts interpret state blue sky laws, and as Howey requires -- that investors must be promised an ongoing contractual interest in a business' revenue, profits, or assets for their investment. In this section, we discuss some of these cases.

A. Howey's test asks to consider whether a proposal resembles the general concept of a security.

The term "investment contract" has been interpreted several times by the Supreme Court, including, of course, in Howey itself. Each time, in applying the Howey test, the court considered whether the transaction reflected what is generally considered to be an essential property of the security.

In addition, the court considered the arrangement's comparison to other instruments previously considered "securities". For example, the Forman case. There, the court observed that no distinction was made between an "investment contract" and an "instrument commonly known as a security," which is another enumerated term in the statutory definition of "securities." Applying Howey, the court held that a stake in a nonprofit housing cooperative was not an "investment contract" because the investor's motivation was "simply to acquire a place to live, not to obtain a financial return on their investment."

Marine Bank provides another example. There, a couple secured a loan for a meat company and exchanged certificates of deposit for a share of the company's profits and the right to use its facilities. The court ruled that neither the certificate of deposit nor the subsequent agreement between the couple and the company were "securities."

Here, case law from the states—from before 1933, see Section I above, and from the federal courts after 1933—emphasize that there must be an "investment contract" by which the investor must obtain A certain contractual interest of the enterprise is obtained by way of profit.

B. Every "investment contract" as defined by the Supreme Court involves a contractual promise to grant a continuing benefit to the business.

Echoing state court decisions before the Blue Sky Act of 1933, Supreme Court decisions after Howey recognized that the holder of an "investment contract" must be promised a continuing right to participate in the income, profits, or assets of the business.

In International Brotherhood of Teamsters v. Daniel, 439 US 551 (1979), the court put particular emphasis on this theme. There, the court observed that "in every decision in which this court considers a 'security' to exist, a person deemed to be an investor elects to forego specific consideration in exchange for a separable financial benefit characteristic of a security." The court found There is in fact no "separable financial interest with the character of a security" before it. Specifically, it concludes that non-contributing, mandatory pension plans are not "securities" because pension benefits purported to be securities represent a fraction of the overall, non-securities compensation individuals receive as a result of their employment part.

To date, every arrangement that the Supreme Court has considered an "investment contract" promises the investor some sort of ongoing, contractual interest in the future endeavors of the business. SEC v. CM Joiner Leasing Corp., a case three years before Howey's, involved offering land leases near planned oil well test wells in exchange for investors "sharing the discovery value of an ongoing 'adventure enterprise.'"

Howey itself involved offering plots of land in citrus groves and contracting promoters to harvest, market and sell citrus in exchange for a "share of net profit" based on inspection at the time of picking.

C. Other relevant judgments

First, the two "investment contract" judgments following Howey—SEC v. iable Annuity Life Ins. Co. of Am., 359 US 65 ( 1959) and SEC v. United Benefit Life Insurance Company, 387 US 202 ( 1967)— These are annuity plans under which investors pay premiums into investment funds managed by life insurance companies and are entitled to a corresponding share of the proceeds.

The Tcherepnin case involved a proposal in an Illinois savings and loan association to offer "revocable capital shares" that would entitle investors to become members of the association, vote their shares, and "receive declared dividends".

Finally, the Edwards case involved an after-sale lease scheme in which a promoter provided payphones, along with a venue lease, lease-back and management agreement, and repurchase Earning a fixed annual return of 14%, the payphones are leased back and managed by the promoter.

Beyond that, the professors found that every "investment contract" identified by the Second Circuit involved a contractual promise to grant a business a continuing benefit, and cited a dozen examples of this.

Why is this considered to "thoroughly disprove the SEC's argument"?

Based on the above, when Minnesota defines "investment contract", it mainly focuses on the two core concepts of "contract" and "investment". Its definition focuses on the investor's acquisition of some form of contractual commitment in a commercial enterprise, and the right to share in the future income, profits or assets of the enterprise as a result of the investment. This definition is based on the traditional concept of capital investment and profit sharing.

However, existing cryptocurrencies differ from this definition. First, **purchasing cryptocurrency does not mean that the investor will receive any kind of contractual commitment, or receive a clear profit-sharing right in a certain commercial enterprise. The value of cryptocurrencies is usually based on market demand and supply, technological advancements, or other external factors, rather than on profit sharing with a particular company or business. **

Second, holders of cryptocurrencies generally do not expect or depend on a particular business or individual for returns or profits. Their returns are usually derived from the appreciation of the currency, which is determined by market forces rather than being driven by a specific business activity or profit.

In general, although cryptocurrency involves "investment" to some extent, its nature, return mechanism, and relationship to the traditional sense of "contract" and "investment contract" make it not easy to be included in Minnesota Investment Contract Definition in Early State Cases.

In the same way, according to the relevant definitions demonstrated in this article, unlike traditional securities or investment contracts, the core value of cryptocurrency mainly depends on its characteristics as a "commodity". First of all, cryptocurrency, such as Bitcoin, was originally designed as a digital currency to provide a decentralized payment method that is not bound by the traditional banking system, which is also used as a payment method in the current major public chains. The means of gas fees is proven. This means that it is essentially a medium of exchange and has commodity value like gold or other items.

Furthermore, the value of cryptocurrencies largely depends on their scarcity, authenticity and unforgeability. For example, the total amount of Bitcoin is limited, which, like gold, has a fixed supply. This scarcity gives it commodity value. Additionally, blockchain technology ensures the authenticity and uniqueness of each cryptocurrency unit, making it less likely to be counterfeited or copied.

These attributes make cryptocurrencies more like gold, crude oil, or any other form of physical commodity than securities or investment contracts in the traditional sense. While people do buy cryptocurrencies as investments expecting their value to rise, this is no different than people buying gold or art expecting it to appreciate in value. Therefore, from this perspective, cryptocurrency should be regarded as an asset with commodity value rather than a security or investment contract in the traditional sense. **