Common Enterprise and Multiple Investors: A Contractual Theory for Defining Investment Contracts and Notes

Friday, January 1st, 1988 at 12:00 am by James D. Gordon III
James D. Gordon III, Common Enterprise and Multiple Investors: A Contractual Theory for Defining Investment Contracts and Notes, 1988 Colum. Bus. L. Rev. 635

The current tests for common enterprise are inadequate. The horizontal test and the narrow vertical test are unrelated to the policy of the acts, and the horizontal test is too narrow. On the other hand, the broad vertical test is too broad. The multiplicity test defines a common enterprise as a profit-seeking venture with multiple parallel investors. The test relates to the policy of the acts because it inquires about bargaining power and the need for statutorily mandated disclosure. Moreover, it solves the difficult puzzle of determining which notes are securities. The multiplicity test offers a compromise between horizontal and vertical commonality and provides a rationale for the Court’s holding in Weaver. It offers what the securities laws have long needed: a more meaningful formula for defining investment contracts and notes.

Author Information

Associate Professor of Law, J. Reuben Clark Law School, Brigham Young University. B.A., 1977, Brigham Young University; J.D., 1980, Boalt Hall School of Law, University of California, Berkeley.