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Posted By: warshawlaw

You can securitize almost anything; remember when David Bowie issued securities on the future royalties of his music?

Focusing on the Federal law exclusively is incorrect. Nearly every developed state has a Blue Skies Law that prohibits the sale of "securities" in the state absent either state or Federal registration. You asked for specifics. OK:

California's Corporate Securities Law of 1968 (Corporations code 25000 et seq) defines security to include "any note; stock; treasury stock; membership
in an incorporated or unincorporated association; bond; debenture;
evidence of indebtedness; certificate of interest or participation in
any profit-sharing agreement; collateral trust certificate;
preorganization certificate or subscription; transferable share;
investment contract..." [25109] and a whole host of similar vehicles.

The definitions are not exclusive; the courts look through the transactions to determine what is really going on. There are cases going all the way back to the 1920s that find securities to exist where the investors put up cash and rely on the efforts of the cash recipients to hold the assets and make them money later on. Here are some examples:

Contracts for the purchase of chinchillas from a corporation, together with agreements of that and another corporation to care for the animals so as to enable the purchasers to share in the profit to be realized from the breeding and the sale through the corporations of the animals and their pelts, constituted investments not only in the animals but also in a service. Hence they were "securities" within the purview of the Corporate Securities Act and of the federal Securities Act of 1933 (15 USCS §§ 77a, 77e), and were void where the corporations had not procured a permit from California or filed with the Securities and Exchange Commission the statement required by the federal statute. Hollywood State Bank v Wilde (1945) 70 Cal App 2d 103, 160 P2d 846."

Where defendant, by instruments in writing agreed that each of certain persons who advanced money to him should "have one-twentieth interest in all of the gold and other values recovered from" a mining claim leased by defendant, and that when he incorporated the copartnership such persons should receive one-twentieth of the stock, each instrument constituted a "security" within the meaning of § 2(7) of the Act. People v Claggett (1933) 130 Cal App 141, 19 P2d 805.

Where corporation, which purported to operate brokerage service assisting qualified citizens to acquire oil and gas leases from federal government on tracts smaller than 640-acre minimum leased by government, entered into transactions involving trust arrangements, wherein purchaser's money and title to lease were held in trust by corporation or its representative until transaction was consummated, corporation, as trustee, issuing confirmation slip to purchaser, confirmation slip constituted certificate of interest in oil lease and hence "security" within this section. Oil Lease Service, Inc. v Stephenson (1958, 2nd Dist) 162 Cal App 2d 100, 327 P2d 628.

Under Corp. Code, § 25019, defining a security to include "evidence of indebtedness" and "investment contract," installment notes bearing interest and providing for payment of a percentage of the gross income generated by the debtor's business were securities, where the investors in the notes provided defendant with money with which to operate his business and in return were promised a share of the gross income, where defendant managed, controlled and operated the business, where the investors had no authority in its conduct and the profit on their investments depended solely on defendant's expertise, skill and honesty, and the investors could be described as "relatively uninformed" regarding the operation of defendant's business. People v Coster (1984, 2nd Dist) 151 Cal App 3d 1188, 199 Cal Rptr 253.

If a unit issued by an individual represents the division of the assets of a business carried on for profit, or in the distribution thereof, of the right to participate in the profits, earnings or income derived from such assets, it is a security under the definition of Corporate Securities Act § 8 subd 2. People v Oliver (1929) 102 Cal App 29, 282 P 813.

Definition of security as "any transferable share, investment contract, or beneficial interest in title to property, profits, or earnings" is designed to embrace speculative schemes to attract risk capital, no matter how ingeniously designed, and courts will look through form to substance to achieve this end. Sarmento v Arbax Packing Co. (1964, 3rd Dist) 231 Cal App 2d 421, 41 Cal Rptr 869.

Policy of state is to subject to regulation all schemes for investment, regardless of forms of procedure employed, that are designed to lead investors into enterprises where earnings and profits of business or speculative ventures must come through management, control, and operation of others and which, regardless of form, have characteristics of operations by corporations, trusts, or similar business structures. People v Rankin (1958, 2nd Dist) 160 Cal App 2d 93, 325 P2d 10.