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SEC v. Koscot Interplanetary, Inc. - 497 F.2d 473 (5th Cir. 1974)

Rule:

Under the Howey test, an investment contract for purposes of the Securities Act, 15 U.S.C.S. § 77b(1), means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. 

Facts:

The Securities & Exchange Commission (SEC) sought an injunction against Koscot Interplanetary, Inc., (Koscot) for allegedly violating the federal securities laws. Specifically, the SEC maintained that the pyramid promotion enterprise operated by Koscot was within the ambit of the term "security", as employed by the Securities Act of 1933 and the Securities Exchange Act of 1934, that as such it had to be registered with the SEC pursuant to the '33 Act, and that the manner in which Koscot purveyed its enterprise to potential investors contravened the anti-fraud provisions of the '34 Act. The district court denied the injunction holding that the Koscot Scheme did not involve the sale of a security.

Issue:

Did the district court err in holding that the Koscot Scheme did not involve the sale of a security?

Answer:

Yes

Conclusion:

Applying the Howey test, the court reversed the district court's decision and remanded. The Court of Appeals for the Fifth Circuit concluded that the Koscot Scheme, in which the promoter retained immediate control over the managerial conduct of an enterprise and the investor's realization of profits was tied to the success of the promotional scheme, encompassed an investment contract and was subject to the anti-fraud provisions of the Exchange Act.

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