Law Office Of Justin London
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Securities Law

London Law Group provides legal services to clients who have lost money in securities due to fraud, misrepresentation, and breach of fiduciary duty.    Brokers and advisors that sell securities or make financial recommendations owe their clients the highest level of trust and loyalty.   Material statements that are false which induce an investor to invest in securities that either are not suitable or which cause an investor to lose money can lead to liability for the broker or advisor that made them.

Most claims against brokers and investment advisors are initiated through claims with FINRA and usually are resolved through arbitration depending on whether the client submitted to arbitration when the client signed brokerage account documents when they opened their account. As a securities law attorney Chicago firm, the Justin London Law provides securities law attorneys or securities fraud attorneys who are extensive knowledge about securities laws. These securities law attorneys or securities fraud attorneys have efficient handle securities law related cases.

The federal securities laws were drafted and have consistently been interpreted from the perspective that flexibility in the law's applicability is paramount. In its seminal case on the interpretation of the term "investment contract", the Supreme Court declared that Congress purposefully gave a broad definition to what constitutes a security. SEC v. W.J. Howey Company, 328 U.S. 293, 299, 66 S.Ct. 1100 (1946) (warning that the "statutory policy of affording broad protection to investors is not to be thwarted by unrealistic and irrelevant formulae"); see also Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, (1967) (noting that "remedial legislation should be construed broadly to effectuate its purposes"), Pinter v. Dahl, 486 U.S. 622, 652, 108 S.Ct. 2063 (1988). Moreover in Reves v. Ernst & Young, the Court explained that the securities laws should be interpreted "against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts." 494 U.S. 56, 63, 110 S.Ct. 945 (1990). Through Howey and its progeny, the Supreme Court has consistently repeated the interpretive principle that courts should determine the contours of the term "security" from the posture that substance should be elevated over form, with a special sensitivity to the economic reality of the transaction, not its formal characteristics. See Tcherepnin, 389 U.S. at 336, 88 S.Ct. 548.

In addition to the principle of flexibility, the second unifying principle of the federal securities laws for courts to consider is the strong preference for full disclosure. Indeed, the remedial thrust of the federal securities laws is to establish full disclosure, not risk-free investment. See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S.Ct. 275 (1963) (holding that the primary purpose of the federal securities laws is to "substitute a philosophy of full disclosure for the philosophy of caveat emptor"); see also Tcherepnin, 389 U.S. at 336, 88 S.Ct. 548.

Defining the Scope of the Federal Securities Laws

Under the Securities Act of 1933, Congress defined a "security" as including investment contracts. 15 U.S.C. § 77b(a)(1). The term "investment contract" was derived from various state legislation that predated the federal securities laws in what were called "blue sky laws". 1 L. Loss & J. Seligman, Securities Regulation 31-43 (3d ed.1998). Indeed the first securities regulation in the nation began at the turn of the twentieth century with the enactment of the "blue sky laws". 

Under these early state regulations, an investment contract was defined as a transaction 1341*1341 that placed capital "in a way intended to secure income or profit from its employment." State v. Gopher Tire & Rubber Co., 146 Minn. 52, 177 N.W. 937, 938 (1920). 
Like the state legislatures that first attempted to regulate investment contracts under the "blue sky laws", Congress also refused to narrowly define the term "investment contract" in favor of offering great latitude to courts to "meet the countless and variable schemes devised by those who seek the use of money of others on the promise of profits." Howey, 328 U.S. at 299, 66 S.Ct. 1100.

The Howey Test

The application of the securities laws by the Supreme Court in Howey may have surprised the promoter as much as some developers are surprised that they may apply to real estate sales, as the case did not deal with traditional securities. The promoter sold tracts in Florida citrus groves to investors. Investors were advised that the purchase was not economically feasible unless they also entered into a service contract with an affiliate of the promoter. Under the service contract, the affiliate provided services in cultivating, developing, harvesting and marketing the crops produced in the tracts, with the net profits distributed to the investors/tract owners. The Howey decision sets forth the classic test of determining when a transaction is properly characterized as an “investment contract,”  one of the types of security covered by the Securities Act of 1933, as amended.  See SEC v. Edwards, 124 S.Ct. 892, 896, 157 (2004);

The Howey test comprises the following three elements: (1) an investment of money; (2) a common enterprise; and (3) the expectation of profits derived solely from the efforts of others. Unique Financial Concepts, Inc., 196 F.3d at 1199 (citing Villeneuve v. Advanced Business Concepts Corp., 698 F.2d 1121, 1124 (11th Cir.1983), aff'd en banc, 730 F.2d 1403 (11th Cir.1984)).

1. Commonality Requirement

Under the horizonal commonality standard, there must be a pooling of investor funds or the pro rata distribution of profits so that the there is a necessary interdependence for returns among investors. 
Under the vertical commonality standard, all that is required is for the success of the investors to be dependent on the success of the investment promoters' efforts to secure a return. 

2. Expectation of profits derived solely from the efforts of others

Promoters' efforts versus external market forces

In order to satisfy the third prong of Howey, investments must be substantively passive and depend on the "entrepreneurial or managerial efforts of others." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051 (1975). The key determination is whether it is the promoters' efforts, not that of the investors, that form the "essential managerial efforts which affect the failure or success of the enterprise." Unique Financial Concepts, 196 F.3d at 1201 (citing SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.1973)).

It is important to note that the original requirement that profits be derived "solely" from the efforts of others has been modified by later opinions to include only that the efforts of others be merely predominant. The Eleventh Circuit has adopted the view that the inquiry is "whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." Unique Financial Concepts, 196 F.3d at 1201 (adopting the reasoning of SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 (5th Cir.1974)).
Application of Howey
Using the Howey analysis, courts have found that viatical settlements are securities.  SEC v. Mutual Benefits, 323 F.Supp.2d 1337 (S.D. Fla. 2004)  and in circumstances, so have condo-hotels.   

Private Placement Memorandums

Firms and start-ups that seek to raise capital through solicitation of angel investors are subject to various state and federal securities registration requirements. However, firms can receive exemption from Securities Exchange Act of 1933 registration requirements if they file an exemption through a Reg D 504, 505, or 506 private placement memorandum (PPM) offering.  Our office provides advisory services and drafts PPMs for firms seeking to raise capital and can advise your company through securities compliance process. 

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