“Opportunity doesn't always knock ... sometimes it rings.” App. 113 (ETS Payphones promotional brochure). And sometimes it hangs up. So it did for the 10,000 people who invested a total of $300 million in the payphone sale-and-leaseback arrangements touted by respondent under that slogan. The Securities and Exchange Commission (SEC) argues that the arrangements were investment contracts, and thus were subject to regulation under the federal securities laws. In this case, we must decide whether a moneymaking scheme is excluded from the term “investment contract” simply because the scheme offered a contractual entitlement to a fixed, rather than a variable, return.

Respondent Charles Edwards was the chairman, chief executive officer, and sole shareholder of ETS Payphones, Inc. (ETS). ^FN* ETS, acting partly through a subsidiary also controlled by respondent, sold payphones to the public via independent distributors. The payphones were offered packaged with a site lease, a 5-year leaseback and management agreement, and a buyback agreement. All but a tiny fraction of purchasers chose this package, although other management options were offered. The purchase price for the payphone packages was approximately $7,000. Under the leaseback and management agreement, purchasers received $82 per month, a 14% annual return. Purchasers were not involved in the day-to-day operation of the payphones they owned. ETS selected the site for the phone, installed the *392 equipment, arranged for connection and long-distance service, collected coin revenues, and maintained and repaired the phones. Under the buyback agreement, ETS promised to refund the full purchase price of the package at the end of the lease or within 180 days of a purchaser's request.

In its marketing materials and on its Web site, ETS trumpeted the “incomparable pay phone” as “an exciting business opportunity,” in which recent deregulation had “open[ed] the door for profits for individual pay phone owners and operators.” According to ETS, “[v]ery few business opportunities can offer the potential for ongoing revenue generation that is available in today's pay telephone industry.” App. 114-115 (ETS brochure); id., at 227 **896 (ETS Web site); see id., at 13 (Complaint ¶¶ 37-38).

The payphones did not generate enough revenue for ETS to make the payments required by the leaseback agreements, so the company depended on funds from new investors to meet its obligations. In September 2000, ETS filed for bankruptcy protection. The SEC brought this civil enforcement action the same month. It alleged that respondent and ETS had violated the registration requirements of §§ 5(a) and (c) of the Securities Act of 1933, 68 Stat. 684, 15 U.S.C. §§ 77e(a), (c), the antifraud provisions of both § 17(a) of the Securities Act of 1933, 114 Stat. 2763A-452, 15 U.S.C. § 77q(a), and § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 114 Stat. 2763A-454, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 CFR § 240.10b-5 (2003). The District Court concluded that the payphone sale-and-leaseback arrangement was an investment contract within the meaning of, and therefore was subject to, the federal securities laws. SEC v. ETS Payphones, Inc., 123 F.Supp.2d 1349 (N.D.Ga.2000). The Court of Appeals reversed. 300 F.3d 1281 (C.A.11 2002) (per curiam). It held that respondent's scheme was not an investment contract, on two grounds. First, it read this Court's opinions to require that an investment contract offer either capital appreciation *393 or a participation in the earnings of the enterprise, and thus to exclude schemes, such as respondent's, offering a fixed rate of return. Id., at 1284-1285. Second, it held that our opinions' requirement that the return on the investment be “derived solely from the efforts of others” was not satisfied when the purchasers had a contractual entitlement to the return. Id., at 1285. We conclude that it erred on both grounds.

“Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.” Reves v. Ernst & Young, 494 U.S. 56, 61, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). To that end, it enacted a broad definition of “security,” sufficient “to encompass virtually any instrument that might be sold as an investment.” Ibid. Section 2(a)(1) of the 1933 Act, 15 U.S.C. § 77b(a)(1), and § 3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10), in slightly different formulations which we have treated as essentially identical in meaning, Reves, supra, at 61, n. 1, 110 S.Ct. 945, define “security” to include “any note, stock, treasury stock, security future, bond, debenture, ... investment contract, ... [or any] instrument commonly known as a ‘security.’ ” “Investment contract” is not itself defined.

[1] The test for whether a particular scheme is an investment contract was established in our decision in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). We look to “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” Id., at 301, 66 S.Ct. 1100. This definition “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., at 299, 66 S.Ct. 1100.

In reaching that result, we first observed that when Congress included “investment contract” in the definition of security, it “was using a term the meaning of which had been *394 crystallized” by the state courts' interpretation of their “ ‘blue sky’ ” laws. Id., at 298, 66 S.Ct. 1100. (Those laws were the precursors to federal securities regulation and were so named, it **897 seems, because they were “aimed at promoters who ‘would sell building lots in the blue sky in fee simple.’ ” 1 L. Loss & J. Seligman, Securities Regulation 36, 31-43 (3d ed.1998) (quoting Mulvey, Blue Sky Law, 36 Can. L. Times 37 (1916)).) The state courts had defined an investment contract as “a contract or scheme for ‘the placing of capital or laying out of money in a way intended to secure income or profit from its employment,’ ” and had “uniformly applied” that definition to “a variety of situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or [a third party].” Howey, supra, at 298, 66 S.Ct. 1100 (quoting State v. Gopher Tire & Rubber Co., 146 Minn. 52, 56, 177 N.W. 937, 938 (1920)). Thus, when we held that “profits” must “come solely from the efforts of others,” we were speaking of the profits that investors seek on their investment, not the profits of the scheme in which they invest. We used “profits” in the sense of income or return, to include, for example, dividends, other periodic payments, or the increased value of the investment.

[2] [3] There is no reason to distinguish between promises of fixed returns and promises of variable returns for purposes of the test, so understood. In both cases, the investing public is attracted by representations of investment income, as purchasers were in this case by ETS' invitation to “ ‘watch the profits add up.’ ” App. 13 (Complaint ¶ 38). Moreover, investments pitched as low-risk (such as those offering a “guaranteed” fixed return) are particularly attractive to individuals more vulnerable to investment fraud, including older and less sophisticated investors. See 2 S.Rep. No. 102-261, App., p. 326 (1992) (Staff Summary of Federal Trade Commission Activities Affecting Older Consumers). Under the reading respondent advances, unscrupulous marketers of investments*395 could evade the securities laws by picking a rate of return to promise. We will not read into the securities laws a limitation not compelled by the language that would so undermine the laws' purposes.

Respondent protests that including investment schemes promising a fixed return among investment contracts conflicts with our precedent. We disagree. No distinction between fixed and variable returns was drawn in the blue sky law cases that the Howey Court used, in formulating the test, as its evidence of Congress' understanding of the term. 328 U.S., at 298, and n. 4, 66 S.Ct. 1100. Indeed, two of those cases involved an investment contract in which a fixed return was promised. People v. White, 124 Cal.App. 548, 550-551, 12 P.2d 1078, 1079 (1932) (agreement between defendant and investors stated that investor would give defendant $5,000, and would receive $7,500 from defendant one year later); Stevens v. Liberty Packing Corp., 111 N.J.Eq. 61, 62-63, 161 A. 193, 193-194 (1932) (“ironclad contract” offered by defendant to investors entitled investors to $56 per year for 10 years on initial investment of $175, ostensibly in sale and leaseback of breeding rabbits).

None of our post- Howey decisions is to the contrary. In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), we considered whether “shares” in a nonprofit housing cooperative were investment contracts under the securities laws. We identified the “touchstone” of an investment contract as “the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others,” and then laid out two examples of investor interests that we had **898 previously found to be “profits.” Id., at 852, 95 S.Ct. 2051. Those were “capital appreciation resulting from the development of the initial investment” and “participation in earnings resulting from the use of investors' funds.” Ibid. We contrasted those examples, in which “the investor is ‘attracted solely by the prospects of a return’ ” on the investment, with *396 housing cooperative shares, regarding which the purchaser “is motivated by a desire to use or consume the item purchased.” Id., at 852-853, 95 S.Ct. 2051 (quoting Howey, supra, at 300, 66 S.Ct. 1100). Thus, Forman supports the commonsense understanding of “profits” in the Howey test as simply “financial returns on ... investments.” 421 U.S., at 853, 95 S.Ct. 2051.

Concededly, Forman's illustrative description of prior decisions on “profits” appears to have been mistaken for an exclusive list in a case considering the scope of a different term in the definition of a security, “note.” See Reves, 494 U.S., at 68, n. 4, 110 S.Ct. 945. But that was a misreading of Forman, and we will not bind ourselves unnecessarily to passing dictum that would frustrate Congress' intent to regulate all of the “countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Howey, supra, at 299, 66 S.Ct. 1100.

Given that respondent's position is supported neither by the purposes of the securities laws nor by our precedents, it is no surprise that the SEC has consistently taken the opposite position, and maintained that a promise of a fixed return does not preclude a scheme from being an investment contract. It has done so in formal adjudications, e.g., In re Abbett, Sommer & Co., 44 S.E.C. 104, 1969 WL 95359 (1969) (holding that mortgage notes, sold with a package of management services and a promise to repurchase the notes in the event of default, were investment contracts); see also In re Union Home Loans (Dec. 16, 1982), 26 S.E.C. Docket 1517, 1519 (report and order regarding settlement, stating that sale of promissory notes secured by deeds of trust, coupled with management services and providing investors “a specified percentage return on their investment,” were investment contracts), and in enforcement actions, e.g., SEC v. Universal Service Assn., 106 F.2d 232, 234, 237 (C.A.7 1939) (accepting SEC's position that an investment scheme promising “assured profit of 30% per annum with no chance of risk or loss to the contributor” was a security because it satisfied the pertinent *397 substance of the Howey test, “ ‘[t]he investment of money with the expectation of profit through the efforts of other persons' ”); see also SEC v. American Trailer Rentals Co., 379 U.S. 594, 598, 85 S.Ct. 513, 13 L.Ed.2d 510 (1965) (noting that “the SEC advised” the respondent that its “sale and lease-back arrangements,” in which investors received “a set 2% of their investment per month for 10 years,” “were investment contracts and therefore securities” under the 1933 Act).

[4] The Eleventh Circuit's perfunctory alternative holding, that respondent's scheme falls outside the definition because purchasers had a contractual entitlement to a return, is incorrect and inconsistent with our precedent. We are considering investment contracts. The fact that investors have bargained for a return on their investment does not mean that the return is not also expected to come solely from the efforts of others. Any other conclusion would conflict with our holding that an investment contract was offered in Howey itself. 328 U.S., at 295-296, 66 S.Ct. 1100 (service contract entitled investors to allocation of net profits).

We hold that an investment scheme promising a fixed rate of return can be an **899 “investment contract” and thus a “security” subject to the federal securities laws. The judgment of the United States Court of Appeals for the Eleventh Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.

U.S.,2004.
S.E.C. v. Edwards
540 U.S. 389, 124 S.Ct. 892, 157 L.Ed.2d 813, 72 USLW 4111, Fed. Sec. L. Rep. P 92,656, 04 Cal. Daily Op. Serv. 267, 2004 Daily Journal D.A.R. 343, 17 Fla. L. Weekly Fed. S 98


Briefs and Other Related Documents (Back to top)

• 2003 WL 22197748 (Appellate Brief) Reply Brief for the Securities and Exchange Commission (Sep. 17, 2003)
• 2003 WL 21940011 (Appellate Brief) Brief for the Respondent (Aug. 07, 2003)
• 2003 WL 21498455 (Appellate Brief) Brief for the Securities and Exchange Commission (Jun. 26, 2003)
• 2003 WL 21508243 (Appellate Brief) Brief Amicus Curiae of AARP in Support of Petitioner (Jun. 26, 2003)
• 2003 WL 21508246 (Appellate Brief) Brief of the North American Securities Administrators Association, Inc., as Amicus Curiae, in Support of the Securities and Exchange Commission (Jun. 26, 2003)
• 2003 WL 21521750 (Appellate Brief) Brief for Public Investors Arbitration Bar Association, Inc. as Amicus Curiae in Support of The United States Securities and Exchange Commission (Jun. 26, 2003)
• 2003 WL 21521754 (Appellate Brief) Brief of the Securities Regulators for the States of Florida and Colorado as Amici Curiae in Support of the Securities and Exchange Commission (Jun. 26, 2003)
• 2003 WL 21911170 (Joint Appendix) (Jun. 26, 2003)
• 2003 WL 21251603 (Appellate Petition, Motion and Filing) Reply Brief for the Petitioner (Mar. 26, 2003) Original Image of this Document (PDF)
• 2003 WL 21251589 (Appellate Petition, Motion and Filing) Motion for Leave to File Brief Amicus Curiae and Brief Amicus Curiae of the North American Securities Administrators Association, Inc., in Support of the Petition for a Writ of Certiorari Filed by the Solicitor General of the United States on Behalf of the Securities and Exchange Commission (Mar. 17, 2003) Original Image of this Document (PDF)
• 2003 WL 21251595 (Appellate Petition, Motion and Filing) Brief for Public Investors Arbitration Bar Association, Inc. as Amicus Curiae in Support of the United States Securities and Exchange Commission (Mar. 17, 2003) Original Image of this Document (PDF)
• 2003 WL 21251602 (Appellate Petition, Motion and Filing) Motion for Leave to File Brief Amici Curiae and Brief Amici Curiae in Support of Petitioner (Mar. 17, 2003) Original Image of this Document (PDF)
• 2003 WL 21251604 (Appellate Petition, Motion and Filing) Brief in Opposition (Mar. 13, 2003) Original Image of this Document (PDF)
• 02-1196 (Docket) (Feb. 14, 2003)

【案由】
上诉人查尔斯·爱德华兹，是ETS付费电话公司（简称ETS）的董事长、首席运营官和唯一的股东。ETS（部分通过也由上诉人控制的一子公司）经独立的经销商向公共出售付费电话。出售的付费电话包括安装场所租约、 5 年回租协议和管理协议、回购协议的一揽子方案。虽然还有其他管理的选择，但投资者中除了一小部分外大都选择了该一揽子方案的安排。一揽子方案付费电话购买价格大约是7000美金，依据回租和管理协议，购买人每月收入82美元，年回报 14% 。购买人对其拥有的付费电话不参与日常运营。ETS选择安装地点，安装设备,安排电话连通和长话服务，收集投币收入和付费电话的日常保持和修理。依照回购计划，ETS承诺租约到期或购买人要求的180天内，返还一揽子计划的购买价格。

美国联邦最高法院在 SEC v. W.J.Howey Co.案的判决中建立了如何判定一个特定计划是投资合同的检验方法：“一项计划是否涉及在普通企业投资资金，而利润来源于他人努力。”该定义“应该赋予灵活解释而不是僵化理解，这样能使其适应管制那些承诺回报利润而利用他人资金的人炮制的层出不穷，变化多端的计划”。因此，在本案中，美国联邦最高法院判决承诺固定回报的投资计划属于“投资合同”，因而应受到联邦证券法的管辖。