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generally recognize that "horizontal" commonality (for example, the | pooling of an investment by two or more investors) is a common | enterprise. A small minority of the federal circuits will also find | a common enterprise in a "vertical" relationship when a single | investor is dependent upon the expertise of a single commodities | broker. Since two or more persons do not share in the profitability | of an undertaking, it is difficult to argue that there is a common | enterprise. Section 102(28)(D) follows a significantly larger | number of federal circuits and adopts a more restrictive form of | vertical commonality that occurs only when there is profit sharing | between two persons even if, for example, one is a conventional | investor and one is a promoter. See generally 2 Louis Loss & Joel | Seligman, Securities Regulation 989-997 (3d ed. Rev. 1999). |
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| | In interpreting all elements of the investment contract, the | courts have emphasized substance, not form. A conventional | partnership involving two individuals who actively participate in | its management and who each own 50 percent interest of its | profits has consistently not been viewed as an investment | contract because profits do not come from the efforts of others. | On the other hand, investments in limited partnership interests | which are traded on stock exchanges consistently have been held | to be investment securities because profits do come substantially | from the efforts of others. Indeed, interests in an entity called | a general partnership may be a security when the general | partnership functions like a limited partnership. See, e.g., | Williamson v. Tucker, 645 F.2d 404, 424 (5th Cir. 1981), cert. | denied, 454 U.S. 897 (1981); see generally 2 Loss & Seligman, | supra, at 1019-1033. |
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| | Section 102(28)(E) is consistent with state and federal | securities laws which have recognized interests in limited | liability companies and limited partnerships in some | circumstances as "securities," see 2 Louis Loss & Joel Seligman, | Securities Regulation 1028-1031 (3d ed. rev. 1999), when | consistent with the court decisions interpreting the investment | contract concept. This Act also refers to an investment in a | viatical settlement or a similar agreement to make unequivocally | clear that viatical settlement and similar agreements, which | otherwise satisfy the definition of an investment contract, are | securities. This is intended to reject the holding of one court | that a viatical contract could not be a security. See SEC v. Life | Partners Inc., 87 F.3d 536 (D.C. Cir. 1996), reh'g denied, 102 | F.3d 587 (D.C. Cir. 1996). A number of states have done so by | statute. |
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| | Judicial construction of the term "investment contract" has | been the most frequently litigated issue concerning the term | "security." See Gabaldon, A Sense of Security: An Empirical |
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