United States Securities and Exchange Commission v. Edwards
Edwards was the founder and majority stockholder of several businesses that together sold pay telephones to purchasers and leased the phones back for fixed monthly fees. After his businesses filed for bankruptcy, the Securities and Exchange Commission (SEC) sued Edwards for selling securities in violation of federal securities laws. The district court granted a preliminary injunction against Edwards and froze his assets. The court of appeals held that the district court did not have subject matter jurisdiction to act because the SEC could not show that Edwards’ sale of pay telephones constituted an investment contract and, thus, a security. The court relied on the Supreme Court’s three-part test in SEC v. W.J. Howey Co., which provides that a financial interest is an investment contract if it involves (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits to be derived solely from the efforts of others. The SEC failed to meet the third prong of the test because the owners of the telephones received a fix monthly sum rather than earnings based on the profits of the company. Because the phone owners’ fees were contractually guaranteed, they were not derived solely from Edwards’ efforts and thus did not constitute an investment contract. The court of appeals dismissed the SEC’s complaint.
Question Presented:
Whether the Eleventh Circuit erred in dismissing the complaint on the ground that an investment scheme is excluded from the term "investment contract" in the definitions of the Securities Exchange
Act of 1934, if the promoter promises a fixed rather than variable return or if the investor is contractually entitled to a particular amount or rate of return.
