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Law School Case Brief

Cont'l Mktg. Corp. v. Sec. & Exch. Com. - 387 F.2d 466 (10th Cir. 1967)

Rule:

In determining the existence of an investment contract, the elements of ownership or control are not essential. The better approach is to disregard form for substance and place emphasis on economic reality. The more critical factor is the nature of the investor's participation in the enterprise. If it is one of providing capital with the hopes of a favorable return then it begins to take on the appearance of an investment contract notwithstanding the fact that there may be more than one party or other than a principal party and his agent on the other end of the transaction or transactions.

Facts:

A preliminary injunction was issued against appellant Continental Marketing Corporation after it engaged in offering for sale and selling investment contracts in its live beaver brokerage business in violation of the anti-fraud provisions of the Securities Act of 1933, 15 U.S.C.S. § 77q(a) and the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b). Appellant sought review of the decision, arguing that the sale contracts were not investments contracts; and thus, were not securities under federal regulations.

Issue:

Were the sale contracts in question investments contracts that should be treated as securities under federal regulations?

Answer:

Yes.

Conclusion:

The Court disagreed with appellant that the sale contracts were not investment contracts and thus not securities under federal regulations. The Court held that determination of whether a contract was an investment contract did not depend upon ownership and control, but rather turned on the nature of the investor's participation in the enterprise. In the case at bar, the Court noted that the investors were engaged in a profit-making venture, and the success of the enterprise depended upon their participation. According to the Court, the situation implied the existence of an investment contract.

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