The 1933 Securities Act defines the term "security." The Supreme Court of the United States has adopted a two-tier analysis of what constitutes a security. Within this analysis the Court has used a three-part test to determine whether a non-traditional
financial transaction constitutes an investment contract and thus a security. Explain (a) the 1933 Act's statutory definition of security, (b) the courts' general interpretation of the 1933 Act's definition and (c) the Supreme Court's two-tier test. Use case law to illustrate your explanation, if appropriate. Also, why do you think the Supreme Court had to devise such an analysis?
(a) Any note; stock; bond; debenture; evidence of indebtedness; preorganization certificate or subscription; investment contract; voting trust certificate; fractional undivided interest in oil, gas, or other mineral rights; or, in general, any interest or instrument commonly known as a security.
(b) The courts generally have interpreted the statutory definition to include nontraditional forms of investments.
(c) The first tier of the Supreme Court's test is whether a financial instrument is designated as a note, stock, bond, or other instrument specifically named in the statute. The Court presumes such instruments are securities and treats them as such. If a financial transaction is not so designated, and is otherwise non-traditional, the Court has used a three-part test (Securities and Exchange Commission v. W.J. Howey Co.). The Court determines whether the transaction involved (1) an investment in a common venture (2) premised on a reasonable expectation of profit (3) to be derived from the entrepreneurial or managerial efforts of others.
The Court did use this analysis to systematically interpret the statute and to further the spirit and basic objectives of the 1933 Act.
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