b) the sale of a franchise where the franchise participated only nominaily in the business and received a share of the profits as a passive investor; c) the sale of limited partnership interests where, pursuant to the statutory requirements, the limited partner does not take an active role in the affairs of the partnership but does share in the profits; d) the sale of resort condominiums when, except for the brief periods during which the buyer occupies the premises, the seiler maintains and rents the property to other vacationers, remitting the profit to the buyer; e) the sale of thoroughbred race horses in connection with an agreement by the seiler or a third party to train, maintain and manage the horses, the interest and involvement of the buyer being substantiaily limited to receipt of profits. In these situations and many more like them, the courts have focused on the similarity between the sale at issue and a normal investment: the investor, once having contributed his capital remains passive in the enterprise with the resulting profits, if any, dependent on the efforts of others. In recent years it has also been recognized that when those investment features are not present, the instrument should not be considered a security even though it might fit literaily within the list found in the statutory definition. In that event, the "economic realities" wiil control and the courts will appiy the statutory language very literaily, holding that aithough the interests might be a security by name, indeed the context does require otherwise. For example, although a promissory note is explicitly included within the statutory definition of security, if it is issued in a commercial or loan setting rather than as an investment, or if the note bears a "strong family resembiance" to one which does not exhibit the normal investment indicia, it wiil not be deemed a security." Likewise, a purchaser of a share of "stock" in a housing project who buys not as an investment (because the possibility of profit is remote) but because it is a prerequisite to securing an apartment in the project, has been held not to have bought a security." Generaily, if the buyer purchases primarily for the purpose of using or consuming the item rather
than earning a profit, the instrument may not be a security. The above examples pertain to the definition of a "security" under the federai securities laws. As indicated, the statutory definition of that term in the Arkansas Securities Act is substantiaily the same and much of the federal interpretation would also apply under the Arkansas Act. However, the Arkansas Supreme Court has also suggested a much less structured approach to the definition in its 1977 decision in Schultz v. Rector-PhillipsMorse, Inc., 261 Ark. 769. The result is that the definition, and therefore the application of the statute, is even less predictable and potentiaily broader in Arkansas. " CONCLUSION Much to the surprise of the attorney who is unfamiliar with them, the state and federal securities laws may apply to many transactions he routinely handles. Hopefuily this discussion wiil alert the general practitioner to that possibility and to the most common ways securities laws may become involved in even relatively private and localized transactions. In many of those situations, however, violations can easily be avoided by a little careful planning. Of necessity, the discussion has been brief and over simplified. In addition, many of the other provisions of the securities laws which are less frequently encountered have not been addressed. Should any of the suggested applications of the securities laws become a reality, or if any of those other provisions become involved in the client's affairs, it is highly recommended that the attorney not rely on this article alone but that he research those laws in greater depth. One parting thought is that much of the securities reguiation field, including some of what is discussed above, may not be long standing. The American Law Institute, under the guidance ofthe preeminent scholar in the fieid, Professor Louis Loss of the Harvard Law School, has adopted a proposed Federal Securities Code. It is anticipated that the Code wiil soon be introduced in Congress. Although its success there is difficult to predict, enactment wouid not only result in codification but also considerable revision of the federal securities laws. ......
15. Exchange National Bank v. Touche Ross
v. Daniel, 439 U.S. 551 (1979). 17. The scope of the definition of "security" in Arkansas is ably addressed in Bell. "Real Estate and Unconventional Securities Concepts Under the Arkansas Securities Act," 3
and Co., 544 F.2d 1126 (2d Cir. 1976).
16. United Housing Foundation, Inc.,
see
Y.
Foreman, 421 U.S. 837 (1975). also, International Brotherhood of Teamsters
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••• Arkansas Cases, SW 1 to 400 S.w.2d; Missouri Statutes Ann., CJS, Tax Court, BTA, Tax Digest, labor reports. P.O. Box 2532, Washington, D.C. 20013.
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UALR L.J. 75 (1980). and Note, "A Definition of 'Investment Contracts' and Equitable Defenses to Suit for Recision for Non-registration Under the Arkansas Securities Act," 1 UALR L.J. 366 (1978).
January 1982/Arkansas Lawyer/35