Colorado Securities Commissioner Loses Important Case Interpreting Definition of ‘Security’

(Originally published December 1, 2015) by Paul Vorndran

Denver District Court recently determined that oil and gas joint venture interests promoted by Colorado companies HEI Resources, Inc. and Heartland Energy Development Corporation were not securities under the Colorado Securities Act. On October 17, 2013 following an intensely contested case brought by the Colorado Securities Commissioner, the Honorable Michael A. Martinez issued a 33 page ruling that analyzed oil and gas joint venture interests. Generally, an interest in a partnership or a joint venture (a partnership established for a particular purpose) is presumed not to be a security.

Judge Martinez considered the question whether the interests were securities under the test set forth in Williamson v. Tucker, 645 F. 2d 404 (5th Cir. 1981). Williamson established that a partnership interest would be considered a security, notwithstanding the strong presumption otherwise, if one of the following exceptions was met: (1) the partnership agreement leaves so little power in the hands of the partner that the arrangement in fact distributes power as would a  limited partnership, (2) the partner is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership powers, or (3)  the partner is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership powers. Having resolved exceptions numbered (1) and (3) against the Securities commissioner earlier in the case, the trial involved only whether exception (2) was met. Judge Martinez concluded that as a while, the joint venturers “were not so inexperienced and unknowledgeable in business affairs that they were incapable of intelligently exercising their partnership powers.”

Given extent of resources already committed by the Commissioner in this action it is likely Judge Martinez’ ruling will be appealed.


This communication is provided for your information only and is not intended to constitute legal advice or legal opinion as to any particular situation. You should not take, or refrain from taking, any action based on information in the article, without seeking legal counsel form an attorney on your particular facts and circumstances. Jones & Keller would be happy to provide you with specific advice about particular situations, if desired. Do not hesitate to contact us.

Print Friendly, PDF & Email