LD 509
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LR 441
Item 1

 
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).

 
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.

 
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.

 
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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