Illegal Sale of Securities

In Indiana the definition of a security is very broad. As provided by Indiana Code 23-2 a security is defined as follows:

“‘Security’ means a note, stock, treasury stock, bond, debenture, evidence of indebtedness, an interest in a limited liability company or limited liability partnership and any class or series of an interest in a limited liability company or limited liability partnership (including any fractional or other interest in an interest in a limited liability company or limited liability partnership), certificate of interest or participation in a profit-sharing agreement, commodity futures contract, option, put, call, privilege, or other right to purchase or sell a commodity futures contract, margin accounts for the purchase of commodities or commodity futures contracts, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, viatical settlement contract, any fractional or pooled interest in a viatical settlement contract, voting-trust certificate, certificate of deposit for a security, certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under the title or lease, an automatic extension or rollover of an existing security, or, in general, an interest or instrument commonly known as a "security", or a certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant, option, or right to subscribe to or purchase, any of the foregoing.”

Under federal law, securities are statutorily defined as, “any note, stock, treasury stock, security future, bond, debenture, investment contract, or any instrument commonly known as a security.” 15 U.S.C. §§ 77b(a)(1), 78c(a)10 (emphasis added).

As noted above, under state and federal law a security is defined as an investment contract. This is one of the most important definitions in both the federal and state statutes. The term investment contact applies to many of the schemes and frauds used to steal money from innocent investors. The prevailing federal test can be found in the case of SEC v. W.J. Howey Co., 328 U.S. 293,299 (1946). In this case, the Supreme Court for the United States held that the test for determining whether an investment scheme is an “investment contract,” and thus a security, is “[w]hether the scheme involves an investment in money in a common enterprise with profits to come solely from the efforts of others.” SEC v. W.J. Howey, Co., 328 U.S. 293,299 (1946). This definition is intentionally broad. According to the Supreme Court, the term "security," "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Id.

Indiana’s test for an “investment contract” is nearly identical to that in Howey. In Sec. Trust Corp. v. Estate of Fisher, the Indiana Court of Appeals held that "an 'investment contract' arises whenever a person; (1) invests money (2) in a common enterprise (3) premised upon a reasonable expectation of profits (4) to be derived from the entrepreneurial or managerial efforts of others." Sec. Trust Corp. v. Estate of Fisher, 797 N.E.2d 789 (Ind. Ct. App. 2003).

Investor Tip: Much of the literature provided by agents selling unregistered securities will make representations that their scheme is not a security. These documents have no legal standing. If the business opportunity meets the above mentioned definitions of a security it must be registered.

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