Brief Fact Summary. Gerald and Mary Smith, (Appellants), brought suit against Gross, Gaddie, and two corporate defendants, (Appellees), for violation of the federal securities laws. Appellants appeal the district court decision to dismiss the suit holding that there was no security involved in the transactions between the parties.
Synopsis of Rule of Law. An investment contract type of security exists when the scheme involves 1) an investment of money 2) in a common enterprise 3) with profits to come solely from the efforts of others.
A dismissal of an action for failure to show that a security is involved is addressed to the merits and, thus, the judgment is based on failure to state a claim 12(b)(6) rather than a lack of subject matter jurisdiction.View Full Point of Law
Issue. Whether the transaction between the parties involved an investment contract.
Held. Yes. The transaction between the parties involved an investment contract.
Discussion. The Appellees persuaded Appellants to invest by representing that the efforts required of them would be minimum. Even if Appellants exerted themselves, they would not gain the promised profits because those profits could only be achieved if Appellants secured additional investors at the inflated prices. Thirdly, the significant effort needed for success was that of Appellees in procuring new investors who would purchase the worms at inflated prices. These facts establish that an investment contract existed.