I recall from the either the securities law or the corporations class taught by Cliff Hodge a section involving attempts to circumvent securities registration requirements by structuring something as other than a security. One involved an orange grove, where the orange trees were sold one at a time but what the promoter was really doing was selling investments in an orange farm.
As I recall it, the test for a security is, more or less, that someone is putting up money to earn money not through their own effort. A few moments in Westlaw (searching “wp(security) & “orange tree”") confirmed this distant memory:
The term ‘investment contract’ is undefined by the Securities Act or by relevant legislative reports. But the term was common in many state ‘blue sky’ laws in existence prior to the adoption of the federal statute and, although the term was also undefined by the state laws, it had been broadly construed by state courts so as to afford the investing public a full measure of protection. Form was disregarded for substance and emphasis was placed upon economic reality. An investment contract thus came to mean a contract or scheme for ‘the placing of capital or laying out of money in a way intended to secure income or profit from its employment.’ State v. Gopher Tire & Rubber Co., 146 Minn. 52, 56, 177 N.W. 937, 938. This definition was uniformly applied by state courts to a variety of situations **1103 where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of some one other than themselves.
This all came to my mind reading about an offer being promoted on the Food52 website, where for a couple of years food writers Amanda Hesser and Merrill Stubbs have had a project of creating a community of recipe-sharers. In their store today, they are featuring the opportunity to invest in, or as they describe it, adopt a truffle tree in France. One puts up $225 (a savings of $74!) and one gets a tree that will harvest in 5 to 9 years. After the first year one pays a $69 annual maintenance charge. At year 6 the lucky ones (how sure a thing are truffle trees? I thought not) have invested $569 and will get their choice– either the cash proceeds of that first crop, or the first crop mailed to them.
I’m having trouble seeing how this isn’t “individuals… invest[ing] money in a common enterprise with the expectation that they would earn a profit solely through the efforts fo the promoter….” At least in exactly the sense that long-ago orange grove fit that definition.
Here’s the text of the offer:
Standard Truffle Tree Adoption
- First harvests generally arrive five to nine years from planting.
- Food52 Exclusive:
- First 10 food52 tree adopters receive a tree planted in 2006, for a 6-year head start!
- After first 10, food52 adopters receive a tree planted in 2009 for a 3-year head start!
- Initial adoption payment covers establishing the truffière, planting the tree, an A4 color photograph of their tree, an adoption certificate, and care for the first year.
- Following the first year, there is a $69 care and maintenance charge.
- Choose between the evergreen Holm Oak, and the white, deciduous Downy Oak.
- Adopted tree stands in a 4m x 5m plot and each adopter will own all the truffles harvested in their area.
- Adopter can elect to have truffles mailed to them or sold at market on their behalf with a check sent at the end of the season.
Instead of being able to go to a stockholders meeting, the Food52 offer holds out the prospect of traveling to France and staying in the bed and breakfast associated with the truffle orchard and picnicking under one’s tree.
One difference — and it may be a big enough difference to matter — is that there seems to be no pooling here, as there was in Howey. In Howey, one purchased rows of trees (not individual trees, at least as I recall the case) and the rows were in a bigger orchard. At harvest, all the oranges in the orchard would be commingled and investors received their pro rata share of the the value of the pooled oranges. Thus it operated very much like a corporation: investment/management by others than the investors/dividends based on relative investments. It was placing form over substance to say that this was anything other than an investment in an orchard operation.
Here, with no pooling — the investor gets his truffles, or their value — so I think the result may well be different. It’s little different from paying someone to sow, raise and reap my wheat crop, even if that someone also sows, raises, and reaps the crops on my neighbor’s farms. As long as the wheat isn’t pooled, everyone is getting his wheat, not his portion of an enterprise.
Obviously, I haven’t done any research, but at first blush I’m comfortable saying that the distinction here may well matter.
You’re right about pooling:
“there is ordinarily no right to specific fruit. The company is accountable only for an allocation of the net profits based upon a check made at the time of picking. All the produce is pooled by the respondent companies, which do business under their own names.”
However, it is startling how many other features of the orange grove are shared: The maintenance contract (optional in Howey and limited to ten years, mandatory here and apparently permanent; the assumption that investors don’t have any knowledge of farming or intent to farm, but will rely on management, the fact that what was purchased was in no sense a free standing entity but depended on its status as part of the grove, and so on.
I’ve added a link to the case for those who want to read it.