SEC v. Koscot Interplanetary, 497 F.2d 473 (1974)

Can an MLM program be a considered a security if it contains two parts, one of which is undoubtedly a legitimate business opportunity?


The Court of Appeals held that the MLM program of Koscott Interplanetary consisted of two distinct parts, one of which was a security for federal securities law purposes. The court held that because prospective recruits were enticed into the program with the prospect of earning commissions on recruiting, rather than selling cosmetics, that the program should properly be divisible into security and non-security components, the latter being subject to regulation by the SEC. Furthermore, the District Court had strictly held to the language of the U.S. Supreme Court in W.J. Howey, requiring that the profits from a "security" must come "solely" from the efforts of others. The participants in Koscott spent time recruiting other participants to attend meetings where they would be pitched the program by Koscott sales personnel. The Appeals court held that the strict adherence to the language in W.J. Howey would defeat the remedial purpose of the statute and that the functional approach of the Ninth Circuit in SEC v. Turner Enterprises should be adopted instead. Ultimately, the Fifth Circuit ruled that the exertion of some effort by the investor is inimical to the holding that the program was a security.

Full case and case summary also available online at:

LOADING PDF: If there are any problems, click here to download the file.

Written by:

Published In:

Reference Info:Federal, 11th Circuit, Georgia | United States

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Babener & Associates | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »


Welcome to MLM Legal - a valuable resource to the Multi-Level Marketing and Direct Sales Industry. ... View Profile »

Follow Babener & Associates:

Reporters on Deadline

All the intelligence you need, in one easy email:

Great! Your first step to building an email digest of JD Supra authors and topics. Log in with LinkedIn so we can start sending your digest...

Sign up for your custom alerts now, using LinkedIn ›

* With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name.