What is an investment contract? For securities laws purposes?

This case is not in the textbook but is helpful I think.

1.  Name of the Case and case cite. 

Smith v. Gross, 9th Cir Court of Appeals, 1979

2.  Who is the plaintiff or movant?  Who is the defendant or respondent?

            Plaintiff is an investor in an earthworms farm

            Defendant is the promoters/sellers 

3.  Exactly what relief has the plaintiff requested?

            Plaintiff seeks damages for violations of “federal securities laws.”   Note:  that is how the federal court got jurisdiction.  

4.  What is the legal basis for the request?

            They entered into an investment contract with the defendants.  The contract was a security which was not registered or exempt.            

5.   What facts does the plaintiff provide that support the request?

            Plaintiffs bought an “earthworms farm.”  The seller defendant’s told them that “very little work was required” and defendants would buy the worms produced which would “guarantee success.”  They said also that they were mislead by representations about how fast worms multiply each year.     

6.   How did the case end at the trial court level?

            The trial court dismissed the complaint “for lack of subject matter jurisdiction” saying the transaction did not involve federal securities laws.  The Court of Appeals reversed.     

7.  Given how the case ended, what is the standard that the court used to resolve the issue?

               Plaintiff did not state a claim for relief.  It’s not clear how or when the trial court dismissed the case.    

8.   What is the defendant’s opposition? 

            The transaction was not a security therefore could not be brought in federal court.   Sellers were simply selling worms and a business concept.  Plaintiffs ran their own business, made profits based on their own abilities.      

9.   Who won and Why?  What is the court’s reasoning for giving the plaintiff what she requested or denying the request. 

            The plaintiffs won at least sending the case back to federal district court.  The C/A said this was an investment contract because it is 1. an investment of money, 2. in a common enterprise, 3. with profits to come solely from the efforts of others.   A big factor was that the deal plaintiffs made was that they would buy worms and that defendants would buy them back at a guaranteed price which guaranteed a certain profit.  The buyers of the worms were not the public but the defendants.        

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