John T. King v. Anne B. Pope

Davidson County -In this case, we must decide whether a pay telephone sale-leaseback program marketed and sold by the plaintiff constitutes an investment contract, and thus a security under the Tennessee Securities Act of 1980. In finding that the program was a security, the trial court applied the definition of "investment contract" adopted by the Court of Criminal Appeals in State v. Brewer, 932 S.W.2d 1 (Tenn. Crim. App.), perm. app. denied (Tenn. 1996). Under this test, an investment contract exists where (1) An offeree furnishes initial value to an offeror, and (2) a portion of this initial value is subjected to the risks of the enterprise, and (3) the furnishing of the initial value is induced by the offeror's promises or representations which give rise to a reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and (4) the offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise. Brewer, 932 S.W.2d at 11 (quoting State v. Hawaii Market, 485 P.2d 105, 109 (Haw. 1971)). The Court of Appeals rejected the Brewer test and instead adopted the federal test for determining whether a particular transaction is an investment contract. See United Hous. Found., Inc. v. Forman, 421 U.S. 837 (1975); SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Applying this test, the Court of Appeals held that the pay telephone sale-leaseback program at issue in this case is not a security. After careful consideration, we agree with the trial court's finding that the appropriate test for determining the presence of an investment contract is set forth in Brewer. Applying this test, we agree with the trial court that the plaintiff's payphone sale-leaseback program is an investment contract and that the plaintiff was thus marketing and selling unregistered securities in violation of Tennessee law.