Tenth Circuit Adopts Williamson Factors in Investment Contract Analysis

Last week on February 24, 2014, the Tenth Circuit reversed the Honorable Robert E. Blackburn's decision in SEC v. Jeffory D. Shields and Geodynamics, Inc. granting Defendants' motion to dismiss on the basis that the joint venture interests offered to the public were not securities under the Securities Acts. The court's decision turned on whether the third prong in SEC v. Howey, 328 U.S. 293 (1946), was met in the context of joint venture agreements. The third prong of the test whether an investment is a security is whether the investment is "premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." The Tenth Circuit previously has held there is a strong presumption that an interest in a general partnership is not a security because partners ordinarily have significant control over the enterprise. Banghart v. Hollywood Gen. P'ship, 902 F.2d 805 (10th Cir. 1990), 902 F.2d 807-08. But in Shields, the Tenth Circuit adopted the Fifth Circuit's approach from Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), and applied its three non-exhaustive factors of how the presumption that a general partnership interest is a security may be rebutted. The court then considered not only the control and power over the venture provided by the terms of the instrument, but also the SEC's allegations that the promoter was the sole source of access to information and the investments were marketed to thousands of people across the country with little or no experience in the oil and gas industry. Under this analysis, the court concluded that there was "a fact issue about whether the voting rights were illusory or a sham." The court held that the allegations in the SEC's complaint in Shields were sufficient to rebut the presumption that the general partnership interests were securities.


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