Federal Securities Act Law

  Whether an Investment is a "Security" is a Question of Law.

From Haberman v WPPSS, 109 Wn.2d 107, 123, 744 P.2d 1032 (1987):

Plaintiffs argue that the trial court improperly dismissed their federal securities claims. Section 12(2) of the federal Securities Act of 1933, 15 U.S.C. § 77l(2), provides a cause of action against any person who “offers or sells a security” through a prospectus containing misrepresentations or omissions. Section 3(a)(2) of the act exempts from section 12 any security issued by a public instrumentality. 15 U.S.C. § 77c(a)(2) (1981). While plaintiffs acknowledge that the WNP 4 and WNP 5 bonds are exempt from section 12, they claim that the Participants’ guaranties of those bonds constitute separate securities that are subject to section 12 liability. Plaintiffs contend that whether the guaranties were separate securities was a factual question improperly decided by the trial court on a motion to dismiss.

First, we note that federal courts consistently determine as a matter of law whether investment schemes are securities. See, e.g., Black v. Payne, 591 F.2d 83, 86 n.1, 88 (9th Cir.) (affirming Fed. R. Civ. P. 12(b)(6) dismissal because no security involved), cert. denied, 444 U.S. 867 (1979); De Luz Ranchos Inv. Ltd. v. Coldwell Banker & Co., 608 F.2d 1297, 1299-1301 (9th Cir. 1979) (question of law whether investment scheme constituted a security); Mason v. Unkeless, 618 F.2d 597, 598 (9th Cir. 1980) (dismissal for failure to show a security was involved proper on Fed. R. Civ. P. 12(b)(6) motion); Frederikson v. Poloway, 637 F.2d 1147, 1153-54 (7th Cir.), cert. denied, 451 U.S. 1017 (1981) (dismissal because no security involved); Ahrens v. American-Canadian Beaver Co., 428 F.2d 926, 928 (10th Cir. 1970) (question of law whether contracts were securities).

Guaranties of Security are not Separate Securities

From Haberman v WPPSS, 109 Wn.2d 107, 124, 744 P.2d 1032 (1987):

Next, we agree with the trial court’s conclusion that the Participants’ guaranties were not separate securities. A similar argument was rejected in Woods v. Homes & Structures of Pittsburg, Kan., Inc., 489 F. Supp. 1270 (D. Kan. 1980). There, municipal bond purchasers sought to avoid the section 3(a)(2) exemption by arguing that certain insurance company guaranties attached to the bonds as certificates were separate securities subject to section 12(2). Woods, at 1292-94. The court noted that the guaranties had not been sold, nor could they have been purchased separately from the bonds. Woods, at 1293. The court concluded that the presence of the guaranties did not destroy the exemption created by the Securities Act of 1933 because the bonds were exempt and because the guaranties were part of those bonds. Woods, at 1293. See also Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1128 (4th Cir. 1970).

Here, no separate Participants’ guaranty existed. The Participants “guaranteed” only that they would purchase their share of WNP 4 and WNP 5 Project Capability whether or not power was produced. This obligation was an indirect guaranty of the bonds only by virtue of resolution 890, which empowered the Supply System to collect the amounts owed by the Participants pursuant to the Participants’ Agreement to pay debt service to the bonds issued. The Participants did not guarantee payment on the bonds directly. The guaranties were neither sold, nor marketed, and could not have been purchased apart from the bonds. We conclude that the guaranties were not separate securities.