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B*/ D// 0,0 D/1 01 062 02 0:3 0^%4 0<4 1e4U6$5U>Z5 05U*6 1u6 72"7 BT7 0cq7 07 D3x8 D-8 0K8 0w#9 AS99 0: 0DW; A; 0F< 0< 0p=U@$>UNd>x>}*@sCJ 0M 0MNxEQ 0U 0DV 1W 72yXXXXXXHP LaserJet 4050 Series PCL 6,,,,0z-s (`$.8dd8    ("  Z6Times New Roman Regular,- C:\PROGRA~1\COREL\WORDPE~1\TEMPLATE\CUSTOM~1\REVISE~1.WPTC:\Program Files\Corel\WordPerfect Office 2000\Template\Custom WP Templates\revised standard opinion.wpt3|x U(hH  Z6Times New Roman RegularLevel 1Level 2Level 3Level 4Level 5Level 1Level 2Level 3Level 4Level 5Level 1Level 2Level 3Level 4Level 5Level 1Level 2Level 3Level 4Level 50.Normal(#$  0  <:Definition T<AA:Definition L , 5+ ` hp x 5  5+ ` hp x 586Definition*+ (_2623  ..*G+M (_25   /%` ` hp x /23  ..  5+ ` hp x 5  *D+M (_24   ," hp x ,23  ..  5+ ` hp x 5  *A+M (_23  ` ) hp x )23  ..  5+ ` hp x 5  *>+M (_22   &hhp x &23  ..  5+ ` hp x 5  *;+M (_21   #p x #23  ..  5+ ` hp x 5  *8+M (_20  h  p x 23  ..  5+ ` hp x 5  *5+M (_19   pp x 23  ..  5+ ` hp x 5  *2+M (_18    x 23  ..  5+ ` hp x 5  * (_1723  Ԁ*GM (_16   /%` ` hp x /23  Ԁ  5+ ` hp x 5  *DM (_15   ," hp x ,23  Ԁ  5+ ` hp x 5  *AM (_14  ` ) hp x )23  Ԁ  5+ ` hp x 5  *>M (_13   &hhp x &23  Ԁ  5+ ` hp x 5  *;M (_12   #p x #23  Ԁ  5+ ` hp x 5  *8M (_11  h  p x 23  Ԁ  5+ ` hp x 5  *5M (_10   pp x 23  Ԁ  5+ ` hp x 5  (2M &_9    x 23  Ԁ  5+ ` hp x 5  ( &_823  (GM &_7   /%` ` hp x /23   5+ ` hp x 5  (DM &_6   ," hp x ,23   5+ ` hp x 5  - -(AM &_5  ` ) hp x )23   5+ ` hp x 5  (>M &_4   &hhp x &23   5+ ` hp x 5  (;M &_3   #p x #23   5+ ` hp x 5  (8M &_2  h  p x 23   5+ ` hp x 5  (5M &_1   pp x 23   5+ ` hp x 5  &2M $_    x 23   5+ ` hp x 5  (''&H1      (&H2  (&H3  (&H4 XXX (&H5  (&H6  20Address8MM6Blockquote , , 5+ ` hp x 5   5+ ` hp x 5,*CITE,dl*CODEKP<6X9`(Courier NewKSQ\  `&Times New RomanS42Emphasis64Hyperlink    <:FollowedHype    4go2Keyboard KP<6X9`(Courier NewKSQ\  `&Times New RomanS <:Preformatted/%  ,Kk %#/KP<6X9`(Courier NewKSQ\  `&Times New RomanS/%  ,Kk %#/<:zBottom of 7F(X7  ?S%2A`Arial?  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XXXXԀ(citations t omitted)).#XXX X# i R$      6     _   Ԁ XX  Forexample,inMcCoyv._Hilliard_,940F.2d660,1991U.S.App.LEXIS17760at24(6th  Cir.1991),theSixthCircuitfoundthataninvestmentcontractexistedwhereriverbargesweresold  eitherindividuallyorthroughlimitedpartnershipstoinvestorsandthebargesthemselves,ratherthan  investorfunds,werepooled.InSECv.ProfessionalAssociates,731F.2d349,354(6thCir.1984), t theSixthCircuitfoundthatcertaintrustagreementswereinvestmentcontracts,becausealthough `  therewasnocomminglingofinvestorassets,thecourtlookedtopromotionalmaterialsthat gave  risetoanimplicationthatinvestors'fundsweretobepooledandconsideredtestimonythat  suggestedthatsomeinvestorsmoneywasactuallycommingled.Finally,inCooperv.King,1997  U.S.App.LEXIS11296,at*6,theSixthCircuitfoundthatwhilepoolingoffundswaspresent,there t wasnoevidenceofcontractualorfinancialarrangementthat inextricablyintertwinedtheinvestors ` fortunes,thus,contrarytotheholdinginProfessionalAssociates,horizontalcommonalitywasnot L  presentinCooper.#  X X#  R$      2     _XX TheMinnesotaSupremeCourtstated: Theplacingofcapitalorlayingoutofmoneyina  wayintendedtosecureincomeorprofitfromitsemploymentisaninvestmentasthatwordis  commonlyusedandunderstood.Ifdefendantissuedandsolditscertificatestopurchaserswhopaid  theirmoney,justlyexpectingtoreceiveanincomeorprofitfromtheinvestment,itwouldseemthat t thestatuteshouldapply.Statev.GopherTire&RubberCo.,177N.W.937,938(Minn.1920).# XX~#(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#2#(   )3  0h(#h(#($0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#2#  0  )3  0(#(#   ' AOCUSER0AOCUSER .    n R$      5     _XX InCooper,theplaintiffswereindividualswhoparticipatedinthe_QCI_Ԁpayphonesale  leasebackprogram._QCI_Ԁdefaultedonitspaymentstotheplaintiffsafteronlyfourpayments,andthe  performancebondpayedonlyafractionofitsobligation.Theplaintiffssuedinfederalcourtunder  federalandstatesecuritieslaws,buttheDistrictCourtandtheCourtofAppealsfoundthatthe t programwasnotasecurityunderthe_Howey_-_Forman_test,asthecourtsfoundthatthesecondprong ` ofthe_Howey_-_Forman_# XX~#XX Ԁtest, acommonenterprise,waslacking.# XX#({$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#2#  a  )3  0p(#(#(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#0p(#(#2#     )3  0p(#p(# W\bcdkloxGaeimquy}Bullet ListBullets Listqp     R$      4     _XX Note,however,thattheMinnesotaSupremeCourt,whichconstrued investmentcontract  in1920,continuestoadheretoitsinitialconstructionandrefusestofollow_Howey_. QXXXXIncontrastto  thefairlyrigid_Howey_test,wehavecontinuedtoabidebyabroaderandmoreflexiblestandard.   InStatev.GopherTire&RubberCo.,146Minn.52,56,177_N.W._Ԁ937,938(1920),wedefinedan x investmentcontractas[_t]he_Ԁplacingofcapitalorlayingoutofmoneyinawayintendedtosecure d incomeorprofitfromitsemployment.Asrecentlyas1973,thiscourtexhaustivelyreviewedthe P  historyofsecuritiesregulationinthisstateandconcludedthatalthoughthe_Howey_testisusefulin <   identifyingmost investmentcontracts,wedeclinetoadoptitasexclusiveunderourstatute.State  v.InvestorsSecurityCorp.,297Minn.1,11,209N.W.2d405,410(1973).Weremainconvinced  thattheGopherTiretestisbettersuitedtofacilitatetheobjectivesofoursecuritiesact,whichis  designedtoprotectinvestorsbyregulatingthemeritsofsecuritiesofferedforsaletothepublic. t Stateby_Spannaus_Ԁv.CoinWholesalers,Inc.,250N.W.2d583,588(Minn.1976).#XXXQX## XX~# !.8Bdd8     _   B8XXdd8=Bdd= sOa  0  0` (#(#@BINTHESUPREMECOURTOFTENNESSEE` (#` (# @kk$ATNASHVILLE0  #B@y#&(#(#   October2,2002Session L XXB #BXX}#JOHNT.KINGv.ANNEB.POPEXXB  J #BXX#XXB@@ AppealbypermissionfromtheCourtofAppeals,MiddleSection  J ChanceryCourtforDavidsonCounty  6 @@No.993550IIIEllen_Hobbs_ԀLyle,Chancellor  " @@*AV) ` dE<` A   @@TTNo.M200002127SCR11CVFiledDecember19,_2002_   AV) ` dE<h` A i     =Bdd=  Inthiscase,wemustdecidewhetherapaytelephonesaleleasebackprogrammarketedand d soldbytheplaintiffconstitutesaninvestmentcontract,andthusasecurityundertheTennessee P SecuritiesActof1980.Infindingthattheprogramwasasecurity,thetrialcourtappliedthe < definitionof investmentcontractadoptedbytheCourtofCriminalAppealsinStatev.Brewer,932 (x S.W.2d1(Tenn._Crim_.App.),perm.app.denied XXXXԀ(Tenn.1996)#XXX X:#.Underthistest,aninvestment d contractexistswhere XXXX8 P   8  (1)An_offeree_Ԁfurnishesinitialvaluetoan_offeror_,and(2)aportionofthisinitial < valueissubjectedtotherisksoftheenterprise,and(3)thefurnishingoftheinitial ( valueisinducedbythe_offeror_'spromisesorrepresentationswhichgiverisetoa  reasonableunderstandingthatavaluablebenefitofsomekind,overandabovethe  initialvalue,willaccruetothe_offeree_Ԁasaresultoftheoperationoftheenterprise,  and(4)the_offeree_Ԁdoesnotreceivetherighttoexercisepracticalandactualcontrol  overthemanagerialdecisionsoftheenterprise.#XXX X# XXXXt   Brewer,932S.W.2dat11(quotingStatev.HawaiiMarket,485P.2d105,109(Haw.1971)).#XXX X #Ԁ `   TheCourtofAppealsrejectedtheBrewertestandinsteadadoptedthefederaltestfor 8!  determiningwhetheraparticulartransactionisaninvestmentcontract.See XXXXUnited_Hous_.Found., $"t! Inc.v._Forman_,421U.S.837(1975)#XXX XK# XXXX;SECv._W.J._Ԁ_Howey_ԀCo.,328U.S.293(1946)#XXX X# XXXX.#XXX X#ԀApplyingthis #`" test,theCourtofAppealsheldthatthepaytelephonesaleleasebackprogramatissueinthiscaseis #L# notasecurity.Aftercarefulconsideration,weagreewiththetrialcourtsfindingthattheappropriate $8 $ testfordeterminingthepresenceofaninvestmentcontractissetforthin XXXXBrewer#XXX X# XXXX.#XXX X#ԀApplyingthistest, %$!% weagreewiththetrialcourtthattheplaintiffspayphonesaleleasebackprogramisaninvestment &"& contractandthattheplaintiffwasthusmarketingandsellingunregisteredsecuritiesinviolationof '"' Tennesseelaw. (#(  Tenn.R.App.P.11;JudgmentoftheCourtofAppealsReversed  p*%*   FrankF._Drowota_,III,C.J.,deliveredtheopinionofthecourt,inwhichE.RileyAnderson, H,', _Adolpho_ԀA.Birch,Jr.,JaniceM.Holder,andWilliamM.Barker,JJ.joined. 4-(- ЇPaulG.Summers,AttorneyGeneralandReporter;MichaelE.Moore,SolicitorGeneral;andJanet  M._Kleinfelter_,SeniorCounsel,Nashville,Tennessee,forAppellant,AnneB.Pope,Commissioner  oftheTennesseeDepartmentofCommerceandInsurance.  R.Louis_Crossley_,Jr.,Knoxville,Tennessee,andW.Davidson_Broemel_,Nashville,Tennessee,for ` Appellee,JohnT.King. L  @@OO& OPINION   `      FactualBackground   8    InFebruary1994,theplaintiff,JohnKing,aregisteredsecuritiesagentandpresidentof   CapitalInvestments,Inc.( _CII_),beganofferingandsellingtoTennesseeresidentsapaytelephone   saleleasebackprogramforQuarterCall,Inc.( _QCI_),acompanythatprovideddiscountpay   telephonelongdistanceservicetoallfiftystates,attherateoftwentyfivecentsperminute.The   programwascomprisedofthreedocuments,allofwhichwereexecutedbyparticipants p simultaneously:apurchaseagreement,atelephoneleaseagreement,andanoptiontosellagreement. \ Participantsfirstsignedthepurchaseagreementtobuyaminimumofthreepaytelephonesfrom H _QCI_,atapriceof$4,995perphone,with$495ofthatamountappliedtowardthepurchaseofa 4 performancebondfromAmericanDiversifiedInsuranceCompany( _ADIC_).Thepurchase  p agreementprovidedthatthetelephoneswouldbedeliveredto_QCI_shomeofficeinBethesda,  \ Maryland. H   Participantsnextexecutedatelephoneleaseagreementwherebytheyleasedthepay   telephonesbackto_QCI_Ԁforatermofsixtymonths._QCI_Ԁagreedtopayparticipants$75permonth   pertelephonefortheterm.Participantsdidnotreceiveanyrightundertheleaseagreementtoany  percentageoftherevenuesorprofitsgeneratedthroughoperationofthepaytelephones.Inaddition,  participantsdidnotshareinthelosses._QCI_Ԁagreedtopayallcostsassociatedwithusingthe  telephones,includingexpensesofrepair,taxes,andinsurance._QCI_Ԁfurtheragreedtoindemnifythe l participantsagainstanyandallloss,damage,liability,andexpenseassociatedwiththepay X  telephones.Whiletheleaseagreementprovidedthat theequipmentshallatalltimesbeunderthe D! soleandabsolutecontrolof_QCI_,participantswereentitledtonotificationoftheirtelephones 0"  exactlocationwithintenbusinessdaysofthetimethetelephoneshadbeeninstalled.Thelease #l! agreementaffordedparticipantstherighttoterminatetheleaseuponsixtydaysnoticeandpayment $X" ofaterminationfee.However,_QCI_Ԁwasnotrequiredtoacceptmorethan100earlyterminations $D # duringanysixtydayperiod. %0!$   Thefinaldocumentparticipantsexecutedwasanoptiontosellagreementwherebytheywere '#& giventheoptiontosellthepaytelephonesbackto_QCI_Ԁatanytimesolongasspecifiednoticewas (#' given:Tosellattheendoftheleaseterm,180daysnoticewasrequired.Tosellpriortotheleases )$( expiration,sixtydaysnoticewasrequired.Uponreceivingtheappropriatenotice,_QCI_Ԁagreedto |*%) purchaseparticipantspaytelephonesfor$4500each,lessanyapplicableearlyterminationfee. h+&* _ԇ  QCIandKingusedpromotionalliterature,containinganumberofrepresentations,tomarket  andadvertisetheprogramtothegeneralpublic.PromotionalliteratureindicatedthatQCIchosethe  locationsforthepaytelephonesandsuppliedadvertisingandmarketingofthepayphoneserviceto  thegeneralpublic.MaterialsincludedaletterfromQCIPresidentGlennKendall,statingthe t following: ` 8   ` Iassumeyouareinterestedbecauseyouarefedupwith3%or4%returnson L  yoursavings;or,maybeyouareuncomfortablewithriskingyourmoneyinthestock 8  market?$ t   8   ` Whateverthereasonsforyourinterest,youareabouttolearnhow,bybuying  ` andleasingpaytelephones,youcanreceive...... L     qW\bcdklop(y3T"W3"  8  W3*23  0`     An18%net,fixedannualreturnonyourmoney.W3*+݌ 8 ` `  Ќ  "W3"  8  W3+23  0`     Fullyguaranteedincome.Yourreturnsareinsuredthroughafaithful $  performancebondfromAmericanDiversifiedInsuranceCompany.W3+,݌ ` `  Ќ  "W3"  8  W3.-23  0`     Monthlyreturns.Youreceiveacheckeverymonthfor60consecutive   months.W3.-g-݌ ` `  Ќ  "W3"  8  W3^.23  0`     Ahighdegreeofliquidity.Youmaywithdrawallorpartofyourmoneyprior   tothefullterm!W3^..݌p` `  Ќ  "W3"  8  W3/23  0`     Substantiallytaxshelteredincome(IRSSection179).Seeyourtaxadvisor.W3//݌\` `  Ќ  "W3"  8  W3023  0`     Security.Youactuallyholdtitletoavaluableassetandalwaysknowwhere H itislocated.W300݌4` `  Ќ  "W3"  8  W3123  0`     Insurance.Yourequipmentisinsuredat100%ofitsvalue.W3152݌ p` `  Ќ  "W3"  8  W3323  0`     Asuccessful,growingcompany.QCIhasgrowntremendouslydueto  \ increasingconsumerdemandfortheQCIdiscountpayphoneswhichenable H callerstocallall50states(includingAlaskaandHawaii)forjust25[cents] 4 perminute.W33@3݌ ` `  Ќ  8      Admin.R.at64(emphasisinoriginal).Additionally,QCIdescribedthenatureofthesaleleaseback  programas averycommonandlegalmethodbywhichcorporationsmayquicklyraisemoneyfor  capitalexpendituresandexpansion,withoutsacrificingequityinthecompany. l   OnMarch22,1994,lessthantwomonthsafterKingbeganadvertisingandmarketingthis D! program,theCommissioneroftheDepartmentofCommerceandInsurance( Commissioner) 0"  issuedaceaseanddesistorderagainstKingandCII,onthebasisthattheQCIsaleleaseback #l! programwasasecurityasdefinedintheTennesseeSecuritiesActof1980( theAct),thatthe $X" programhadnotbeenregisteredasasecurity,andtherefore,thatKingandCIIhadviolatedtheAct $D # bysellingthisunregisteredsecurity.Thereafter,theSecuritiesDivisionoftheDepartmentof %0!$ CommerceandInsurancefiledacomplaintseekingtorevokeKingsregistrationasasecuritiesagent &"% forviolatingtheAct.Kingsresponsedeniedallallegationsandrequestedacontestedcasehearing '#& undertheUniformAdministrativeProceduresAct.Followingapretrialconference,theparties (#' stipulatedastothefactsandsubmittedbriefsontheissueofwhethertheQCIsaleleaseback )$( programwasasecurityunderTennesseelaw.TheAdministrativeLawJudge,applyingthetest |*%) adoptedinStatev.Brewer,932S.W.2d1(Tenn.Crim.App.),perm.app.denied XXXXԀ(Tenn.1996)#XXX X;#, h+&* concludedthatthesaleleasebackprogramwasasecurity.TheCommissionerissuedafinalorder  adoptingthefindingsandconclusionsoftheAdministrativeLawJudgeanddirectingthatKings  licenseberevoked.    KingfiledapetitionforjudicialreviewintheChanceryCourtofDavidsonCounty.See ` Tenn.CodeAnn.45322(1999).ThechancerycourtheldthattheHawaiiMarkettestadopted L  inBreweristheappropriatetesttoapplytodetermineifthesaleleasebacktransactionwasan 8  investmentcontract.Applyingthistest,theChancellorupheldtheCommissionersdecision $ t revokingKingslicenseforsellingunregisteredsecuritiesinviolationofstatelaw.  `   Kingappealed,andtheCourtofAppealsreversed.Insodoing,theintermediatecourt  8  rejectedthetestadoptedinBrewerandheldthatthefederalHoweyFormandefinitionfor $   investmentcontractistheappropriatetesttoapplyinTennesseewhendeterminingwhethera   transactionconstitutesaninvestmentcontract.TheCourtofAppealsfoundthattheQCIsale   leasebackprogramwasnotaninvestmentcontractbecauseitlackedthe commonenterprise   element.Therefore,theCourtofAppealsheldthatKingslicenseshouldnotberevokedforselling   unregisteredsecurities. p   WegrantedtheCommissionersapplicationforpermissiontoappealandnowreversethe H judgmentoftheCourtofAppeals. 4      `     h      p      x     StandardofReview  \  DK  ResolutionoftheissuesbeforethisCourthingesontheinterpretationofTennesseeCode 4 Annotatedsection XXXX482102(12)#XXX XD#Ԁandtheapplicationofthatlawtothefactsofthecase.    Constructionofastatuteanditsapplicationtothefactsofacaseareissuesoflaw.Pattersonv.   TennesseeDept.ofLaborandWorkforceDev.,60S.W.3d60,62(Tenn.2001)(citingBeareCo.v.  TennesseeDept.ofRevenue,858S.W.2d906,907(Tenn.1993)). Thereviewofaquestionoflaw  isdenovo,withnopresumptionofcorrectnessaffordedtotheconclusionsofthecourtbelow.State  v.McKnight,51S.W.3d559,562(Tenn.2001)(citingComdataNetwork,Inc.v.TennesseeDept. l ofRevenue,852S.W.2d223,224(Tenn.1993);TennesseeFarmersMut.Ins.Co.v.Witt,857 X  S.W.2d26,29(Tenn.1993);Nashv.Mulle,846S.W.2d803,804(Tenn.1993)). D! ZD   Analysis  $X"  TheDefinitionofanInvestmentContract  %0!$ H XXXXK  WebeginouranalysiswiththelanguageoftheTennesseeSecuritiesActof1980,which '#& definestheterm securityasfollows: (#' 8  (12)Securitymeansanynote,stock,treasurystock,bond,debenture,evidenceof )$( indebtedness,certificateofinterestorparticipationinanyprofitsharingagreement, |*%) collateraltrustcertificate,preorganizationcertificateorsubscription,transferable h+&* share,investmentcontract,votingtrustcertificate,certificateofdepositforasecurity,  certificateofinterestorparticipationinanoil,gas,orminingtitleorleaseorin  paymentsoutofproductionundersuchatitleorlease;or,ingeneral,anyinterestor  instrumentcommonlyknownasa security,oranycertificateofinterestor t participationin,temporaryorinterimcertificatefor,receiptfor,guaranteeof,or ` warrantorrighttosubscribetoorpurchaseanyoftheforegoing.L    Tenn.CodeAnn.482102(12)(1995)(emphasisadded).Thisdefinitionissubstantiallyidentical 8  todefinitionscontainedinthefederalSecuritiesActof1933#XXX XI# XXXXԀandthefederalSecuritiesExchangeAct $ t of1934#XXX XO# XXXXԀ.SeeSecuritiesActof1933,15U.S.C.77b(1)(2002);SecuritiesExchangeActof1934,  ` 15U.S.C.78c(a)(10)(2002).Whilethestatutemakesplainthataninvestmentcontractisa  L  security,thestatutedoesnotdefinetheterm investmentcontract.  8  #XXX XO#  TheCommissionerarguesthattheCourtofAppealsdecisionrejectingBrewerandapplying   HoweyFormanconflictswiththefundamentalpurposeofTennesseessecuritieslaws,whichisto   protectinvestors.Assupportforthisclaim,theCommissionerreliesuponthisCourtsdecisionin   DeWeesv.State, S390S.W.2d241,242(Tenn.1965),directingthatsecuritieslawsareremedial   statutesthatmustbeliberallyconstruedtoprotectinvestorsfromfraud. p   Abriefreviewofthedevelopment,history,andpurposeofstatesecuritieslawsisnecessary > toplacethisissueincontext.Securitiesregulationfirstdevelopedasstatelaw.Statesecurities * statutes,or blueskylaws,werethiscountryssolemeansofregulatingsecuritiesformorethantwo  decades,untilthefederalgovernmentenactedtheSecuritiesActof1933andtheSecuritiesExchange  Actof1934.g #  1      ׀Increatingthefederalsecuritiesregulationlaws,Congresshasspecificallyrefusedto  preemptstateblueskylaws.See15U.S.C.77r(2002).Thus,bothstateandfederallawsnow  regulatethemarketingandsalesofsecurities. v   Onereasonforthisdualsystemofsecuritiesregulationisthatthestateandfederallawswere D adoptedtoservedifferentpurposes.LikeTennessee,statesenactedsecuritiesregulationtoprotect 0 investors.See1980Tenn.Pub.Acts,ch.866,25 XXXXԀ(statingthatthesecuritieslawsareintended to  protectinvestors);seealso,e.g.,Carderv.Burrow,940S.W.2d429(Ark.1997);Peoplev.   Figueroa,715P.2d680,695(Cal.1986);Rosenthalv.DeanWitterReynolds,908P.2d1095,1105 ! (Colo.1995);Skurnickv.Ainsworth,591So.2d904,906(Fla.1994);Ratliffev.HartsfieldCo.,184 " S.E.324,327(Ga.1935);#XXX XgX# XXXXStatev.HawaiiMarket,485P.2d105,109(Haw.1971)#XXX XZ# XXXX;Statev.Coin |#  Wholesalers,Inc.,250N.W.2d583,588(Minn.1976).Federalsecuritiesregulations,ontheother h$! hand,wereenactedtoservethebroaderpurposeofprotectingtheintegrityoftheincreasingly T% " nationalizedmarket.See15U.S.C.78b(2002);#XXX X[# XXXXԀRobertB.Thompson,TheMeasureofRecovery @&!#  UnderRule10b-5:ARestitutionAlternativetoTortDamages,37Vand.L.Rev.349,393(1984) ,'|"$ (quotingShapirov.MerrillLynch,Pierce,Fenner&Smith,Inc.,495F.2d228,23637(2dCir.  1974)).     Thedifferent,butcomplementary,purposesservedbythedualsystemofsecuritiesregulation j isfurtherreflectedinthedifferingtreatmentoftheterm investmentcontractbystateandfederal  V courts.Thetermwasfirstusedbystatelegislaturesandfirstconstruedbystatecourts.Seekingto  B affordmaximumprotectiontoinvestors,statecourts,liketheMinnesotaSupremeCourt,j #  2      ׀construed  . thetermbroadlyinaccordancewithitscommonlyunderstoodmeaning.     #XXX X\# XXXXTwentysixyearslater,theUnitedStatesSupremeCourtdefined investmentcontractas H  itappliedtotheSecuritiesExchangeActof1933inSECv.W.J.HoweyCo.,328U.S.293(1946). 4  #XXX X`#UnderHowey, XXXXaninvestmentcontract meansacontract,transactionorschemewherebyaperson  p  investshismoneyinacommonenterpriseandisledtoexpectprofitssolelyfromtheeffortsofthe  \  promoterorathirdparty.#XXX X4b#Ԁ XXXXԀId.at29899(emphasisadded).#XXX X}c# XXXXԀThisdefinitionwascriticizedasbeing H  toorigid,particularlyitsrequirementthatprofitsbederivedsolelyfromtheeffortsofthepromoter 4 orathirdparty.h, #  3      ׀     In1971,theHawaiiSupremeCourtbecameoneofthefirststatecourtstoopenlyrejectthe N Howeytestandformulateamoreflexibletestfordeterminingwhichtransactionsconstitutean : investmentcontractunderitsstatesecuritieslaws.w  #  4      ׀SeeStatev.HawaiiMarket,485P.2d105(Haw. &v 1971).TheHaw#XXX Xc# XXXXaiiMarkettestrequiresproofofthefollowingfourelementsforaninvestment  contracttobepresent:8  #XXX X;g# XXXX 8  (1)Anoffereefurnishesinitialvaluetoanofferor,and(2)aportionofthisinitial + valueissubjectedtotherisksoftheenterprise,and(3)thefurnishingoftheinitial  valueisinducedbytheofferor'spromisesorrepresentationswhichgiverisetoa  reasonableunderstandingthatavaluablebenefitofsomekind,overandabovethe   initialvalue,willaccruetotheoffereeasaresultoftheoperationoftheenterprise,   and(4)theoffereedoesnotreceivetherighttoexercisepracticalandactualcontrol w  overthemanagerialdecisionsoftheenterprise.#XXX Xh# XXXXc    Id.at109.#XXX X$k# XXXXTheHawaiiSupremeCourtutilizedtheconceptsfrom riskcapitaltheory,statingthat    the subjectionoftheinvestorsmoneytotherisksofanenterpriseoverwhichheexertsno   managerialcontrolisthebasiceconomicrealityofasecuritytransaction.Id. z    AfewyearsaftertheHawaiiMarketdecision,theUnitedStatesSupremeCourtrevisitedthe H  testadoptedinHowey.RespondingtothecriticismofHowey,theCourtinFormanemphasizedthat 4 indeterminingwhetheraparticulartransactionisaninvestmentcontractandthusa security,the   focusmustbeon thesubstance"theeconomicrealitiesofthetransaction"ratherthanthenames   thatmayhavebeenemployedbytheparties.UnitedHous.Found.,Inc.v.Forman,421U.S.837,  85152(1975).Tothisend,theCourtstatedthat [t]hetouchstoneisthepresenceofaninvestment  inacommonventurepremisedonareasonableexpectationofprofitstobederivedfromthe  entrepreneurialormanagerialeffortsofothers.Id.at852.#XXX Xk# XXXXThus,the HoweyFormantest l emergedasthenew,moreflexiblefederaltestforwhatconstitutesasecurity. X #XXX Xp# XXXX  Againstthisbackdrop,in1996,theTennesseeCourtofCriminalAppealselectedtoemploy & theHawaiiMarkettesttodeterminewhetherthetransactioninquestionwasaninvestmentcontract  underTennesseelaw.SeeBrewer,932S.W.2dat14.Insupportofitsdecision,theBrewercourt  notedthat,asof1996,seventeenjurisdictionshadadoptedtheHawaiiMarkettest.Seeid.at13  n.13.Furthermore,Brewerhighlightedthesimilaritiesbetweenthetwotestsasfollows:  8  ThefirstprongoftheHawaiiMarkettestisnothingmorethantheinvestment   conceptoftheHoweyFormantest.Thesecondprongadoptstheconceptofrisk ! capital,whereasHoweyFormanfocusesontheexistenceofacommonventure,i.e., " verticalorhorizontalcommonality.ThethirdprongofHawaiiMarketutilizesthe # moreliberalconceptoftheexpectationtoreceivea benefitinsteadoftheslightly u$  morerestrictiveconceptof profitsfoundinHoweyForman.Lastly,thefourth  prongmakesexplicit,inlaymansterms,theHoweyFormanprinciplethatthe  investorexercisesnomanagerialcontrol.   Id.at1314.    InadoptingtheHawaiiMarkettest,theBrewercourtnotedthatDeWeesmandatedliberal  V constructionofsecuritieslawstoprotectthepublicandthattheHawaiiMarkettestbetterservesthe  B remedialpurposeofTennesseessecuritieslawsbyembracingnotonly obviousandcommonplace  . investmentschemes,butalso thecountlessandvariableschemesdevisedbythosewhoseekthe   moneyofothersonthepromiseofprofits.Id.at14(quotingHowey,328U.S.at299).   Additionally,theBrewercourtdeemedtheHawaiiMarkettestsuperiorinprovidingdetailed    statementsofitselementsinlaymansterms,whichpromotestheproperadministrationofjustice   bythejury.Id. z    #XXX Xq# XXXXInthiscase,thetestadoptedinBrewerwasappliedbytheadministrativelawjudge,the H  Commissioner,andthechancerycourt.However,theCourtofAppealsadoptedtheHoweyForman 4 testusedbytheSixthCircuitinCooperv.King,No.965361,1997U.S.App.LEXIS11296,(6th   Cir.May9,1997),anunpublishedcaseinvolvingthesaleofpaytelephonesinthesamemannerand   underthesametermsasinthepresentcase.n #  5      ׀#XXX X{#    Aftercarefulconsideration,weconcludetheCourtofAppealserredinadoptingtheHowey &v Formantest.Theappropriatetestfordefiningan investmentcontractunderTennesseelawisthe b HawaiiMarkettestadoptedinBrewer.First,theGeneralAssemblyhasstatedthattheTennessee N SecuritiesActof1980shouldbeinterpreted toeffectuateitsgeneralpurposetoprotectinvestors : and tocoordinatetheinterpretationandadministrationofthisActwithrelatedfederalandstate & regulation.1980Tenn.Pub.Acts,ch.866,25.AsnotedbytheBrewercourt, XXXXtheHawaiiMarket  testbetterservestheremedialpurposeofTennesseessecuritieslawsbyembracingnotonly   obviousandcommonplaceinvestmentschemes,butalso thecountlessandvariableschemes  devisedbythosewhoseekthemoneyofothersonthepromiseofprofits.Brewer,932S.W.2dat  14(quotingHowey,328U.S.at299).#XXX X#ԀAspreviouslyexplained,stateandfederalregulationsserve r  differentpurposes.Whilethefederaltestistailoredtofederallaw,theHawaiiMarkettestadopted ^! inBrewerismoreinkeepingwiththepublicpolicyespousedbythisCourtinDeWeesbecauseit J" presentsamoreflexibledefinitionof investmentcontract. 6#  u$    KingarguesthattheHoweyFormantestadvancesthesecondstatedpurposeofthe1980Act  "uniformityandcoordinationwithstateandfederalregulation.See XXXX1980Tenn.Pub.Acts,ch.866,  25#XXX X'#.Insupportofthisargument,Kingemphasizesthat XXXXԀthe#XXX X׆#Howey-Formantesthasbeenadopted  byamajorityofjurisdictionsandthattheamplecaselawfromotherjurisdictionsapplyingthe t HoweyFormantesttovarioustransactionsprovidesnoticetoinvestorsandbrokersofthetypesof ` transactionsthatqualifyasinvestmentcontractsunderTennesseelaw.Wedisagree.Whilethe L  GeneralAssemblyclearlyintendedforTennesseessecuritieslawstooperateharmoniouslywith 8  federalandotherstatesecuritiesregulations,adoptingtheHoweyFormantestdoesnotaccomplish $ t thisresult XXXXԀbecausethistest#XXX Xщ#Ԁisnotconsistentlyappliedamongthestatesorthefederalcircuits.  `   TheprimaryareaofdisagreementsurroundstheHowey-Formantestssecondelement:a   commonenterprise.eXXXXThreebasesforcommonalityarerecognizedbythefederalcourts.Thestrictest z  testisthatofhorizontalcommonality,#XXXeX#fXXXXrequiringthepoolingofassetsinwhichthefortunesofthe f  individualinvestorsareinextricablyintertwinedbycontractualandfinancialarrangement.See R  UnionPlantersNatlBankv.CommercialCreditBus.Loans,Inc.,651F.2d1174,1183(6thCir. >  1981).#XXXfX#eXXXXTheothertest,verticalcommonality,hastwovariants.Narrowverticalcommonality *z requiresthattheinvestorsfortunesbe interwovenwithanddependentupontheeffortsandsuccess f ofthoseseekingtheinvestmentofthirdparties.SECv.GlennW.TurnerEnters.,474F.2d476, R 482n.7(9thCir.1973).Broadverticalcommonality,ontheotherhand,onlyrequiresthatthewell > beingoftheinvestorsbedependentonthepromotersexperience.SeeSECv.SGLtd.,265F.3d * 42,49(1stCir.2001)#XXXeX#eXXXX.#XXXeXJ#eXXXX    #XXXeX#eXXXXTheUnitedStatesSupremeCourthasnotadoptedatestforthecommonenterpriseelement D oftheHoweyFormantest,andthecircuitsaresplitonthisissue.#XXXeX# XXXXԀBoththeSixthandSeventh 0 Circuitsrequireashowingofhorizontalcommonalitytosatisfythecommonenterpriseelement. l See,e.g.,Curranv.MerrillLynch,Pierce,Fenner&Smith,622F.2d216,222,224(6thCir.1980); X Walsv.FoxHillsDev.Corp.,24F.3d1016,1018(7thCir.1994).Fourothercircuitshaveadopted D horizontalcommonality,buthaveyettoruleonwhetherverticalcommonalityalsowouldbe 0 acceptable.SeeSECv.InfinityGroupCo.,212F.3d180,187n.9(3dCir.2000),cert.denied,121  S.Ct.1228(2001);SECv.LifePartners,Inc.,87F.3d536,544(D.C.Cir.1996);Teaguev.Bakker,   35F.3d978,986n.8(4thCir.1994);Revakv.SECRealtyCo.,18F.3d81,88(2dCir. ! 1994)(rejectingbroadverticalcommonality).Thus,theHoweyFormantestisnotapplied " consistentlyamongthecircuits.Moreover,#XXX X# XXXXdespiteitsadherencetohorizontalcommonality,the |#  SixthCircuithasnotbeenconsistentinitsinterpretationofthe poolingoffundsrequirement.i #  6      #XXX Xz# XXXXԀIn h$! addition,stateswithintheSixthCircuit"Ohio#XXX X# XXXX,Kentucky,andMichigan"havevarying  approachestodefininganinvestmentcontract.T#XXX XN# XXXXheOhioCourtofAppealshasadoptedtheHawaii  Markettest.SeeStatev.George,362N.E.2d1223(Ohio.App.1975).#XXX X# XXXXԀTheKentuckyCourtof  AppealshasadoptedtheHoweyFormandefinition,ashastheMichiganCourtofAppeals.See t ScholarshipCounselors,Inc.v.Waddle,507S.W.2d138(Ky.1974);Rzepkav.Michael,431 ` N.W.2d441(Mich.App.1988)#XXX Xݙ# XXXX.However,aMichiganstatutedefines securitybyusingthe L  languageoftheHawaiiMarkettest.SeeMich.Comp.Laws451.801(1)#XXX Xc# XXXXԀ(2002).#XXX XS# XXXXGiventhefederal 8  andstatecourtsvaryinginterpretationsofHoweyForman,Kingsassertionthatitsadoptionwill $ t advanceuniformityandpredictabilityhasahollowring.  `   WereiterateandreaffirmourstatementinDeWees,thatsecuritieslaws areremedialin   character,designedtopreventfraudsandimpositionsuponthepublic,andconsequentlyshouldbe z  liberallyconstruedtoeffectuatethepurposeoftheacts.390S.W.2dat242#XXX X# XXXX.SincetheTennessee f  SecuritiesActof1980wasenactedwiththegoalofprotectinginvestors,thisCourtsprimary R  concerniswiththeinvestorsofthisstate.ThisCourtalsobelievesthatthedangerinadoptingthe >  stricterHoweyFormantestfor investmentcontractisthatitallowsunscrupulouspromotersto *z circumventthelaw.#XXX X-# XXXXԀ#XXX X+# XXXXԀThus,wefindthattheHawaiiMarkettestasadoptedinBreweristhetestbetter f suitedtoprotectinvestors.#XXX Xn# XXXX   h     #XXX X@# XXXX R #XXX X# XXXXI   TheBrewerTestasAppliedtotheSaleLeasebackProgram    A.InitialValue  N ?N  ThefirstprongoftheBrewertestrequiresthattheoffereefurnishes initialvalue. | ParticipantsinKingandQCIsprogramboughtaminimumofthreepaytelephonesat$4995perpay h telephone.Participantsnevertookpossessionofthephones,nordidparticipantspaytaxesonthe T phonesorchooselocationsfortheirphones.Furthermore,itisclearfrompromotionalmaterialsthat @ QCIintendedtheprogramto quicklyraisemoneyforcapitalexpendituresandexpansion,without , | sacrificingequityinthecompany.#XXX X # !h  W"   Kingarguesthat,inthecaseofthesaleofpersonalproperty,theremustbeanoverpayment  offairvaluebytheinvestorinorderfortheretobeafindingofinitialvalue.Kingbaseshis  argumentonHawaiiMarket,inwhichparticipantsinaprivatewholesaleclubschemepayedgrossly  inflatedpricesforconsumeritemsinordertojointheclubandreceivefuturecommissionsonsales. t Ratherthanbeingarequirementfor initialvalue,however,thepresenceofoverpaymentwas ` simplyhowtheHawaiiMarketcourtdistinguishedthetransactionfromasimplepurchaseof L  merchandise.Inthiscase,Kingsprogramrequireslittledistinguishingfromasaleofmerchandise: 8  purchasersnevertookpossessionofthepaytelephones,and,furthermore,QCIwasnotinthe $ t businessofsellingpaytelephones:QCIwasinthebusinessofprovidingdiscountlongdistance  ` telephoneservice.Thus,thisCourtfindsthatProng1,thefurnishingofinitialvalue,issatisfied.  L     `    B.InitialValueSubjecttotheRisksoftheEnterprise  f    ThesecondprongoftheBrewertestrequiresthataportionoftheinitialvaluebesubjectto 4 therisksoftheenterprise.AstheBrewercourtstated,this secondprongadoptstheconceptofrisk   capital.Brewer,932S.W.2dat13.TheBrewercourtexplainedthat [u]ndertheriskcapitaltest   thefocusis...onwhetherthepromoterisrelyingontheinvestorsforasubstantialportionofthe  initialcapitalnecessarytolaunchtheenterprise.Id.at11(citingStatev.ConsumerBus.Sys.,Inc,  482P.2d549,555(Or.App.1971)).QCIwaslookingforaquickmeansoffinancinga$50million  expansion.Thepromotionalmaterialsclearlystatedthat [b]ygoingtoprivateinvestors,QCIisable l toraiseexpansioncapitalquicklywithouthavingtogiveupvaluableequity.Thesepromotional X materialsclearlyreflecttheriskcapitalconcept:investorsweresoughtoutbyKing,theypaidvalue, D andinreturntheyexpectedQCItopaythemareturnontheirinvestment.Furthermore,investors 0 didnotrelyontheirownpaytelephonestoproduceanincome;instead,investorsweredependent l ontheprofitabilityoftheentireenterprise. X   Kingarguesthatthisprongisnotmetbecausetheleaseprovidedforafixedpaymentthat  wassecuredbyaperformancebond.However,itisclearfromtherecordthatpotentialinvestors r  wereledtobelievethatthetransactionwasaninvestment.QCIpromotionalmaterialsinvited ^! participantstojoin ourgrowingQCInetworkandpledgedthat itisQCIsbusinesspolicytoshare J" theprofitswithourclients,bypayingthemaveryhighrateofreturn.Thechancerycourtfound 6# thattheperformancebondwasessentiallyworthlessfromtheoutsetbecauseitwasguaranteedby "$r  aninsurancecompanythatwasneitherregisterednorqualifiedtodobusinessinTennessee.King %^ ! asksthisCourttolookonlyatthestructureofthetransaction,tofocusontheprovisionofthelease %J!" securingpaymentbyaperformancebond,andtoignoretherealitythattheperformancebondwas &6"# worthless.Todosowouldexaltformoversubstance,somethingwhich,intheinterestofprotecting '"#$ theinvestorsofthisstate,thisCourtrefusestodo.Thus,wefindthatthesecondprongofthe ($% Brewertestismet. )$& 0   C.InitialValueInducedbyPromisesofBenefitsinExcessofInitialValue  (,x'( Їx  ThethirdprongoftheBrewertestisthattheinvestorhada reasonableunderstandingthat  avaluablebenefitofsomekind,overandaboveinitialvalue,willaccrueasaresultoftheoperation  oftheenterprise. XXXXBrewer,932S.W.2dat11.#XXX X)#ԀTheQCIpromotionalmaterialsarerelevantto  determiningtheexistenceofthiselement.Thematerialscontainseveralassurancesthatparticipants t willreceiveabenefit: ` 8  Iassumeyouareinterested[inthisprogram]becauseyouarefedupwith3%or4%   returnsonyoursavings;or,maybeyouareuncomfortablewithriskingyourmoney   inthestockmarket?w    Admin.R.at64.   8  QCIsTelephoneEquipmentLeaseAgreementwillgiveyouanexceptional18%  E  returnonyourprincip al.Thisiswhatyouwillearneachyearforafiveyearterm. 1  Youwillreceiveacheckfor$75.00for60consecutivemonthsforeachunit   purchased.    Admin.R.at68(emphasisinoriginal). H    KingarguesthatthethirdprongoftheBrewertestislackingbecauseQCIsobligationwas v fixedandwasnotdependentontheenterprisemakingaprofit.However,theHawaiiMarketcourt b rightlynotedthatitis irrelevanttotheprotectivepoliciesofthesecuritieslawsthattheinducements N leadinganinvestortoriskhisinitialinvestmentarefoundedonthepromisesoffixedreturnsrather : thanashareofprofits.HawaiiMarket,485P.2dat110.Participantsinthissaleleaseback &v programclearlyexpectedabenefitastheresultofQCIssuccessfuloperation,andthethirdprong b isthussatisfied. N    D.NoRighttoExerciseControl  |   ThefourthandfinalprongoftheBrewertestrequires XXXXԀthatthe offereedoesnotreceivethe J righttoexercisepracticalandactualcontrolovermanagerialdecisionsoftheenterprise.#XXX XC#Ԁ XXXXBrewer, 6 932S.W.2dat11#XXX X(#.Kingarguesthatsincethepurchaserhastherighttoterminatetherelationship  " withQCI,thepurchaserhastherighttoexerciseultimatecontroloverthedestinyofhisorher ! phone.TheStatecallsthisrighttoterminatemisleading:theagreementactuallyrequiresthe " paymentofapotentiallylargeearlyterminationfee,andQCIlimitsthenumberofearlyterminations # itmustacceptinanysixtydayperiod.Additionally,astheCommissionerpointsout,therightto $ terminaterelatestoliquidity.Therighttoterminatecertainlyisnottheequivalentofexercising n%  practicalandactualcontrolovermanagerialdecisions.Participantsinthissaleleasebackprogram Z&!! hadnorighttoexercisepracticaloractualmanagerialcontrol.Participantsnevertookpossession F'"" ofthepaytelephones,andtheyhadnocontroloverthelocationoruseofthetelephones.Thus,we 2(## findthattheparticipantsdidnotreceivetherighttoexercisepracticalandactualcontrolover )n$$ managerialdecisionsandthatthefourthandfinalprongoftheBrewertestissatisfied.   *Z%%    `    5,''    Conclusion      Forthereasonsstatedherein,weholdthattheQCIsaleleasebackprogrammarketedandsold .~ bytheplaintiffwasasecurityundertheTennesseeSecuritiesActof1980.Therefore,theplaintiff j wasofferingandsellinganunregisteredsecurityinviolationofTennesseelaw.Accordingly,we  V reversethejudgmentoftheCourtofAppealsandreinstatethejudgmentoftheTennessee  B DepartmentofCommerceandInsurance.Costsofthisappealaretaxedtotheappellee,JohnT.  . King,forwhichexecutionmayissueifnecessary.      `    ___________________________________   Ѐ   `    FRANKF.DROWOTA,III,CHIEFJUSTICE   L#BXX9#