Tennessee v. Brewer

What is the proper definition of an investment contract?

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The Tennessee Supreme Court held that the proper definition of an investment contract is the definition espoused by the Supreme Court of Hawaii: (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. The Appellants had been convicted of selling unregistered securities in conjunction with a private warehouse club. The club distributed cards to members who distributed them to others, and the member received a commission on the sales to those who used their cards. The ultimate purpose of the club was not to sell merchandise to the members, but to use them to recruit other potential members. Because the income of members was derived primarily from the managerial efforts of those they recruited, the arrangement was a security under state law.

Case and case summary are also available online at: http://www.mlmlegal.com/legal-cases/Tennessee_v_Brewer.php

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Published In: MLM / Direct Sales Updates, MLM Consulting / Network Marketing Updates, Securities Updates

Reference Info:State, 6th Circuit, Tennessee | United States

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