471 U.S.

681
105 S.Ct. 2297
85 L.Ed.2d 692

LANDRETH TIMBER COMPANY, Petitioner

v.
Ivan K. LANDRETH et al.
No. 83-1961.
Argued March 26, 1985.
Decided May 28, 1985.

Syllabus
Respondents father and sons, who owned all of the common stock of a
lumber business that they operated, offered their stock for sale through
brokers. The company's sawmill was subsequently damaged by fire, but
potential purchasers were told that the mill would be rebuilt and
modernized. Thereafter, a stock purchase agreement for all of the stock
was executed, and ultimately petitioner company was formed by the
purchasers. Respondent father agreed to stay on as a consultant for some
time to help with the daily operations of the mill. After the acquisition
was completed, the mill did not live up to the purchasers' expectations.
Eventually, petitioner sold the mill at a loss and went into receivership.
Petitioner then filed suit in Federal District Court for rescission of the sale
of stock and damages, alleging that respondents had violated the
registration provisions of the Securities Act of 1933 (1933 Act) and the
antifraud provisions of the Securities Exchange Act of 1934 (1934 Act).
The court granted summary judgment for respondents, holding that under
the "sale of business" doctrine, the stock could not be considered a
"security" for purposes of the Acts because managerial control of the
business had passed into the hands of the purchasers, who bought 100% of
the stock. The court concluded that the transaction thus was a commercial
venture rather than a typical investment. The Court of Appeals affirmed.
Held: The stock at issue here is a "security" within the definition of the
Acts, United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct.
2051, 44 L.Ed.2d 621, distinguished, and the "sale of business" doctrine
does not apply. Pp. 685-697.

(a) Section 2(1) of the 1933 Act and 3(a)(10) of the 1934 Act define a
"security" as including "stock" and other listed types of instruments.
Although the fact that instruments bear the label "stock" is not of itself
sufficient to invoke the Acts' coverage, when an instrument is both called
"stock" and bears stock's usual characteristics as identified in Forman,
supra, a purchaser justifiably may assume that the federal securities laws
apply. The stock involved here possesses all of the characteristics
traditionally associated with common stock. Moreover, reading the
securities laws to apply to the sale of stock at issue here comports with
Congress' remedial purpose in enacting the legislation to protect investors.
Pp. 685-688.
(b) When an instrument is labeled "stock" and possesses all of the
traditional characteristics of stock, a court is not required to look to the
economic substance of the transaction to determine whether the stock is a
"security" within the meaning of the Acts. A contrary rule is not supported
by this Court's prior decisions involving unusual instruments not easily
characterized as "securities." Nor were the Acts intended, as asserted by
respondents, to cover only "passive investors" and not privately negotiated
transactions involving the transfer of control to "entrepreneurs." Pp. 688692.
(c) An instrument bearing both the name and all of the usual
characteristics of stock presents the clearest case for coverage by the plain
language of the definition. "Stock" is distinguishable from most if not all
of the other listed categories, and may be viewed as being in a category by
itself for purposes of interpreting the Acts' definition of "security." Pp.
693-694.
(d) Application of the "sale of business" doctrine depends on whether
control has passed to the purchaser. Even though the transfer of 100% of a
corporation's stock normally transfers control, the purchasers here had no
intention of running the sawmill themselves. Moreover, if the doctrine
were applied here, it would also have to be applied to cases in which less
than 100% of a company's stock was sold, thus inevitably leading to
difficult questions of line-drawing. As explained in Gould v. Ruefenacht,
471 U.S. 701, 105 S.Ct. 2308, 85 L.Ed.2d 708, coverage by the Acts
would in most cases be unknown and unknowable to the parties at the
time the stock was sold. Such uncertainties attending the applicability of
the Acts would be intolerable. Pp. 694-697.
731 F.2d 1348 (CA9 1984) reversed.

James Linwood Quarles, III, Washington, D.C., for petitioner.

James A. Smith, Jr., Seattle, Wash., for respondents.
Justice POWELL delivered the opinion of the Court.

This case presents the question whether the sale of all of the stock of a
company is a securities transaction subject to the antifraud provisions of the
federal securities laws (the Acts).

* Respondents Ivan K. Landreth and his sons owned all of the outstanding
stock of a lumber business they operated in Tonasket, Washington. The
Landreth family offered their stock for sale through both Washington and outof-state brokers. Before a purchaser was found, the company's sawmill was
heavily damaged by fire. Despite the fire, the brokers continued to offer the
stock for sale. Potential purchasers were advised of the damage, but were told
that the mill would be completely rebuilt and modernized.

Samuel Dennis, a Massachusetts tax attorney, received a letter offering the

stock for sale. On the basis of the letter's representations concerning the
rebuilding plans, the predicted productivity of the mill, existing contracts, and
expected profits, Dennis became interested in acquiring the stock. He talked to
John Bolten, a former client who had retired to Florida, about joining him in
investigating the offer. After having an audit and an inspection of the mill
conducted, a stock purchase agreement was negotiated, with Dennis the
purchaser of all of the common stock in the lumber company. Ivan Landreth
agreed to stay on as a consultant for some time to help with the daily operations
of the mill. Pursuant to the terms of the stock purchase agreement, Dennis
assigned the stock he purchased to B & D Co., a corporation formed for the
sole purpose of acquiring the lumber company stock. B & D then merged with
the lumber company, forming petitioner Landreth Timber Co. Dennis and
Bolten then acquired all of petitioner's Class A stock, representing 85% of the
equity, and six other investors together owned the Class B stock, representing
the remaining 15% of the equity.

After the acquisition was completed, the mill did not live up to the purchasers'
expectations. Rebuilding costs exceeded earlier estimates, and new components
turned out to be incompatible with existing equipment. Eventually, petitioner
sold the mill at a loss and went into receivership. Petitioner then filed this suit
seeking rescission of the sale of stock and $2,500,000 in damages, alleging that
respondents had widely offered and then sold their stock without registering it

as required by the Securities Act of 1933, 15 U.S.C. 77a et seq. (1933 Act).
Petitioner also alleged that respondents had negligently or intentionally made
misrepresentations and had failed to state material facts as to the worth and
prospects of the lumber company, all in violation of the Securities Exchange
Act of 1934, 15 U.S.C. 78a et seq. (1934 Act).
5

Respondents moved for summary judgment on the ground that the transaction
was not covered by the Acts because under the so-called "sale of business"
doctrine, petitioner had not purchased a "security" within the meaning of those
Acts. The District Court granted respondents' motion and dismissed the
complaint for want of federal jurisdiction. It acknowledged that the federal
statutes include "stock" as one of the instruments constituting a "security," and
that the stock at issue possessed all of the characteristics of conventional stock.
Nonetheless, it joined what it termed the "growing majority" of courts that had
held that the federal securities laws do not apply to the sale of 100% of the
stock of a closely held corporation. App. to Pet. for Cert. 13a. Relying on
United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44
L.Ed.2d 621 (1975), and SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100,
90 L.Ed. 1244 (1946), the District Court ruled that the stock could not be
considered a "security" unless the purchaser had entered into the transaction
with the anticipation of earning profits derived from the efforts of others.
Finding that managerial control of the business had passed into the hands of the
purchasers, and thus that the transaction was a commercial venture rather than a
typical investment, the District Court dismissed the complaint.

The United States Court of Appeals for the Ninth Circuit affirmed the District
Court's application of the sale of business doctrine. 731 F.2d 1348 (1984). It
agreed that it was bound by United Housing Foundation, Inc. v. Forman,
supra, and SEC v. W.J. Howey Co., supra, to determine in every case whether
the economic realities of the transaction indicated that the Acts applied.
Because the Courts of Appeals are divided over the applicability of the federal
securities laws when a business is sold by the transfer of 100% of its stock, we
granted certiorari. 469 U.S. 1016, 105 S.Ct. 427, 83 L.Ed.2d 354 (1984). We
now reverse.

II
7

It is axiomatic that "[t]he starting point in every case involving construction of

a statute is the language itself." Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723, 756, 95 S.Ct. 1917, 1935, 44 L.Ed.2d 539 (1975) (POWELL, J.,
concurring); accord, Teamsters v. Daniel, 439 U.S. 551, 558, 99 S.Ct. 790, 795,
58 L.Ed.2d 808 (1979). Section 2(1) of the 1933 Act, 48 Stat. 74, as amended

and as set forth in 15 U.S.C. 77b(1), defines a "security" as including

8

"any note, stock, treasury stock, bond, debenture, evidence of indebtedness,

certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas, or other mineral
rights, . . . or, in general, any interest or instrument commonly known as a
'security,' or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing." 1

As we have observed in the past, this definition is quite broad, Marine Bank v.
Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982), and
includes both instruments whose names alone carry well-settled meaning, as
well as instruments of "more variable character [that] were necessarily
designated by more descriptive terms," such as "investment contract" and
"instrument commonly known as a 'security.' " SEC v. C.M. Joiner Leasing
Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 123, 88 L.Ed. 88 (1943). The face of
the definition shows that "stock" is considered to be a "security" within the
meaning of the Acts. As we observed in United Housing Foundation, Inc. v.
Forman, supra, most instruments bearing such a traditional title are likely to be
covered by the definition. Id., at 850, 95 S.Ct., at 2059.

10

As we also recognized in Forman, the fact that instruments bear the label
"stock" is not of itself sufficient to invoke the coverage of the Acts. Rather, we
concluded that we must also determine whether those instruments possess
"some of the significant characteristics typically associated with" stock, id., at
851, 95 S.Ct., at 2060, recognizing that when an instrument is both called
"stock" and bears stock's usual characteristics, "a purchaser justifiably [may]
assume that the federal securities laws apply," id., at 850, 95 S.Ct., at 2059. We
identified those characteristics usually associated with common stock as (i) the
right to receive dividends contingent upon an apportionment of profits; (ii)
negotiability; (iii) the ability to be pledged or hypothecated; (iv) the conferring
of voting rights in proportion to the number of shares owned; and (v) the
capacity to appreciate in value.2 Id., at 851, 95 S.Ct., at 2060.

11

Under the facts of Forman, we concluded that the instruments at issue there
were not "securities" within the meaning of the Acts. That case involved the
sale of shares of stock entitling the purchaser to lease an apartment in a housing
cooperative. The stock bore none of the characteristics listed above that are
usually associated with traditional stock. Moreover, we concluded that under

the circumstances, there was no likelihood that the purchasers had been misled
by use of the word "stock" into thinking that the federal securities laws
governed their purchases. The purchasers had intended to acquire low-cost
subsidized living space for their personal use; no one was likely to have
believed that he was purchasing investment securities. Ibid.
12

In contrast, it is undisputed that the stock involved here possesses all of the
characteristics we identified in Forman as traditionally associated with common
stock. Indeed, the District Court so found. App. to Pet. for Cert. 13a. Moreover,
unlike in Forman, the context of the transaction involved herethe sale of
stock in a corporationis typical of the kind of context to which the Acts
normally apply. It is thus much more likely here than in Forman that an
investor would believe he was covered by the federal securities laws. Under the
circumstances of this case, the plain meaning of the statutory definition
mandates that the stock be treated as "securities" subject to the coverage of the
Acts.

13

Reading the securities laws to apply to the sale of stock at issue here comports
with Congress' remedial purpose in enacting the legislation to protect investors
by "compelling full and fair disclosure relative to the issuance of 'the many
types of instruments that in our commercial world fall within the ordinary
concept of a security.' " SEC v. W.J. Howey Co., 328 U.S., at 299, 66 S.Ct., at
1103 (quoting H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1933)). Although we
recognize that Congress did not intend to provide a comprehensive federal
remedy for all fraud, Marine Bank v. Weaver, supra, 455 U.S., at 556, 102
S.Ct., at 1223, we think it would improperly narrow Congress' broad definition
of "security" to hold that the traditional stock at issue here falls outside the
Acts' coverage.

III
14

Under other circumstances, we might consider the statutory analysis outlined

above to be a sufficient answer compelling judgment for petitioner.3
Respondents urge, however, that language in our previous opinions, including
Forman, requires that we look beyond the label "stock" and the characteristics
of the instruments involved to determine whether application of the Acts is
mandated by the economic substance of the transaction. Moreover, the Court of
Appeals rejected the view that the plain meaning of the definition would be
sufficient to hold this stock covered, because it saw "no principled way," 731
F.2d, at 1353, to justify treating notes, bonds, and other of the definitional
categories differently. We address these concerns in turn.

15

It is fair to say that our cases have not been entirely clear on the proper method
of analysis for determining when an instrument is a "security." This Court has
decided a number of cases in which it looked to the economic substance of the
transaction, rather than just to its form, to determine whether the Acts applied.
In SEC v. C.M. Joiner Leasing Corp., for example, the Court considered
whether the 1933 Act applied to the sale of leasehold interests in land near a
proposed oil well drilling. In holding that the leasehold interests were
"securities," the Court noted that "the reach of the Act does not stop with the
obvious and commonplace." 320 U.S., at 351, 64 S.Ct., at 123. Rather, it ruled
that unusual devices such as the leaseholds would also be covered "if it be
proved as matter of fact that they were widely offered or dealt in under terms or
courses of dealing which established their character in commerce as 'investment
contracts,' or as 'any interest or instrument commonly known as a 'security.' "
Ibid, 64 S.Ct., at 124.

16

SEC v. W.J. Howey Co., supra, further elucidated the Joiner Court's suggestion
that an unusual instrument could be considered a "security" if the
circumstances of the transaction so dictated. At issue in that case was an
offering of units of a citrus grove development coupled with a contract for
cultivating and marketing the fruit and remitting the proceeds to the investors.
The Court held that the offering constituted an "investment contract" within the
meaning of the 1933 Act because, looking at the economic realities, the
transaction "involve[d] an investment of money in a common enterprise with
profits to come solely from the efforts of others." 328 U.S., at 301, 66 S.Ct., at
1104.

17

This so-called "Howey test" formed the basis for the second part of our decision
in Forman, on which respondents primarily rely. As discussed above, see Part
II, supra, the first part of our decision in Forman concluded that the
instruments at issue, while they bore the traditional label "stock," were not
"securities" because they possessed none of the usual characteristics of stock.
We then went on to address the argument that the instruments were "investment
contracts." Applying the Howey test, we concluded that the instruments
likewise were not "securities" by virtue of being "investment contracts" because
the economic realities of the transaction showed that the purchasers had parted
with their money not for the purpose of reaping profits from the efforts of
others, but for the purpose of purchasing a commodity for personal
consumption. 421 U.S., at 858, 95 S.Ct., at 2063.

18

Respondents contend that Forman and the cases on which it was based 4 require
us to reject the view that the shares of stock at issue here may be considered

"securities" because of their name and characteristics. Instead, they argue that
our cases require us in every instance to look to the economic substance of the
transaction to determine whether the Howey test has been met. According to
respondents, it is clear that petitioner sought not to earn profits from the efforts
of others, but to buy a company that it could manage and control. Petitioner was
not a passive investor of the kind Congress intended the Acts to protect, but an
active entrepreneur, who sought to "use or consume" the business purchased
just as the purchasers in Forman sought to use the apartments they acquired
after purchasing shares of stock. Thus, respondents urge that the Acts do not
apply.
19

We disagree with respondents' interpretation of our cases. First, it is important

to understand the contexts within which these cases were decided. All of the
cases on which respondents rely involved unusual instruments not easily
characterized as "securities." See n. 4, supra. Thus, if the Acts were to apply in
those cases at all, it would have to have been because the economic reality
underlying the transactions indicated that the instruments were actually of a
type that falls within the usual concept of a security. In the case at bar, in
contrast, the instrument involved is traditional stock, plainly within the
statutory definition. There is no need here, as there was in the prior cases, to
look beyond the characteristics of the instrument to determine whether the Acts
apply.

20

Contrary to respondents' implication, the Court has never foreclosed the

possibility that stock could be found to be a "security" simply because it is
what it purports to be. In SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64
S.Ct. 120, 88 L.Ed. 88 (1943), the Court noted "[W]e do nothing to the words
of the Act; we merely accept them. . . . In some cases, [proving that the
documents were securities] might be done by proving the document itself,
which on its face would be a note, a bond, or a share of stock." Id., at 355, 64
S.Ct., at 125. Nor does Forman require a different result. Respondents are
correct that in Forman we eschewed a "literal" approach that would invoke the
Acts' coverage simply because the instrument carried the label "stock." Forman
does not, however, eliminate the Court's ability to hold that an instrument is
covered when its characteristics bear out the label. See supra, at 686-687.

21

Second, we would note that the Howey economic reality test was designed to
determine whether a particular instrument is an "investment contract," not
whether it fits within any of the examples listed in the statutory definition of
"security." Our cases are consistent with this view.5 Teamsters v. Daniel, 439
U.S., at 558, 99 S.Ct., at 795 (appropriate to turn to the Howey test to
"determine whether a particular financial relationship constitutes an investment

contract"); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct.
2051, 44 L.Ed.2d 621 (1975); see supra, at 689. Moreover, applying the Howey
test to traditional stock and all other types of instruments listed in the statutory
definition would make the Acts' enumeration of many types of instruments
superfluous. Golden v. Garafalo, 678 F.2d 1139, 1144 (CA2 1982). See
Tcherepnin v. Knight, 389 U.S. 332, 343, 88 S.Ct. 548, 556, 19 L.Ed.2d 564
(1967).
22

Finally, we cannot agree with respondents that the Acts were intended to cover
only "passive investors" and not privately negotiated transactions involving the
transfer of control to "entrepreneurs." The 1934 Act contains several provisions
specifically governing tender offers, disclosure of transactions by corporate
officers and principal stockholders, and the recovery of short-swing profits
gained by such persons. See, e.g., 1934 Act, 14, 16, 15 U.S.C. 78n, 78p.
Eliminating from the definition of "security" instruments involved in
transactions where control passed to the purchaser would contravene the
purposes of these provisions. Accord, Daily v. Morgan, 701 F.2d 496, 503
(CA5 1983). Furthermore, although 4(2) of the 1933 Act, 15 U.S.C. 77d(2),
exempts transactions not involving any public offering from the Act's
registration provisions, there is no comparable exemption from the antifraud
provisions. Thus, the structure and language of the Acts refute respondents'
position. 6

B
23

We now turn to the Court of Appeals' concern that treating stock as a specific
category of "security" provable by its characteristics means that other
categories listed in the statutory definition, such as notes, must be treated the
same way. Although we do not decide whether coverage of notes or other
instruments may be provable by their name and characteristics, we do point out
several reasons why we think stock may be distinguishable from most if not all
of the other categories listed in the Acts' definition.

24

Instruments that bear both the name and all of the usual characteristics of stock
seem to us to be the clearest case for coverage by the plain language of the
definition. First, traditional stock "represents to many people, both trained and
untrained in business matters, the paradigm of a security." Daily v. Morgan,
supra, at 500. Thus persons trading in traditional stock likely have a high
expectation that their activities are governed by the Acts. Second, as we made
clear in Forman, "stock" is relatively easy to identify because it lends itself to
consistent definition. See supra, at 686. Unlike some instruments, therefore,
traditional stock is more susceptible of a plain meaning approach.

25

Professor Loss has agreed that stock is different from the other categories of
instruments. He observes that it "goes against the grain" to apply the Howey
test for determining whether an instrument is an "investment contract" to
traditional stock. L. Loss, Fundamentals of Securities Regulation 211-212
(1983). As Professor Loss explains:

26

"It is one thing to say that the typical cooperative apartment dweller has bought
a home, not a security; or that not every installment purchase 'note' is a security;
or that a person who charges a restaurant meal by signinghis credit card slip is
not selling a security even though his signature is an 'evidence of indebtedness.'
But stock (except for the residential wrinkle) is so quintessentially a security as
to foreclose further analysis." Id., at 212 (emphasis in original).

27

We recognize that in SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct.
120, 88 L.Ed. 88 (1943), the Court equated "notes" and "bonds" with "stock" as
categories listed in the statutory definition that were standardized enough to rest
on their names. Id., at 355, 64 S.Ct., at 125. Nonetheless, in Forman, we
characterized Joiner language as dictum. 421 U.S., at 850, 95 S.Ct., at 2059.
As we recently suggested in a different context in Securities Industry Assn. v.
Board of Governors, FRS, 468 U.S. 137, 104 S.Ct. 2979, 82 L.Ed.2d 107
(1984), "note" may now be viewed as a relatively broad term that encompasses
instruments with widely varying characteristics, depending on whether issued
in a consumer context, as commercial paper, or in some other investment
context. See id., at 149-153, 104 S.Ct., at 2985-2988. We here expressly leave
until another day the question whether "notes" or "bonds" or some other
category of instrument listed in the definition might be shown "by proving
[only] the document itself." SEC v. C.M. Joiner Leasing Corp., supra, 320 U.S.,
at 355, 64 S.Ct., at 125. We hold only that "stock" may be viewed as being in a
category by itself for purposes of interpreting the scope of the Acts' definition
of "security."

IV
28

We also perceive strong policy reasons for not employing the sale of business
doctrine under the circumstances of this case.7 By respondents' own admission,
application of the doctrine depends in each case on whether control has passed
to the purchaser. It may be argued that on the facts of this case, the doctrine is
easily applied, since the transfer of 100% of a corporation's stock normally
transfers control. We think even that assertion is open to some question,
however, as Dennis and Bolten had no intention of running the sawmill
themselves. Ivan Landreth apparently stayed on to manage the daily affairs of
the business. Some commentators who support the sale of business doctrine

believe that a purchaser who has the ability to exert control but chooses not to
do so may deserve the Acts' protection if he is simply a passive investor not
engaged in the daily management of the business. Easley, Recent
Developments in the Sale-of-Business Doctrine: Toward a Transactional
Context-Based Analysis for Federal Securities Jurisdiction, 39 Bus.Law. 929,
971-972 (1984); Seldin, When Stock is Not a Security: The "Sale of Business"
Doctrine Under the Federal Securities Laws, 37 Bus.Law. 637, 679 (1982). In
this case, the District Court was required to undertake extensive factfinding,
and even requested supplemental facts and memoranda on the issue of control,
before it was able to decide the case. App. to Pet. for Cert. 13a.
29

More importantly, however, if applied to this case, the sale of business doctrine
would also have to be applied to cases in which less than 100% of a company's
stock was sold. This inevitably would lead to difficult questions of linedrawing. The Acts' coverage would in every case depend not only on the
percentage of stock transferred, but also on such factors as the number of
purchasers and what provisions for voting and veto rights were agreed upon by
the parties. As we explain more fully in Gould v. Ruefenacht, 471 U.S. 701,
704-706, 105 S.Ct. 2308, 85 L.Ed.2d 708 decided today as a companion to this
case, coverage by the Acts would in most cases be unknown and unknowable to
the parties at the time the stock was sold. These uncertainties attending the
applicability of the Acts would hardly be in the best interests of either party to a
transaction. Cf. Marine Bank v. Weaver, 455 U.S., at 559, n. 9, 102 S.Ct., at
1225, n. 9 (rejecting the argument that the certificate of deposit at issue there
was transformed, chameleon-like, into a "security" once it was pledged).
Respondents argue that adopting petitioner's approach will increase the
workload of the federal courts by converting state and common-law fraud
claims into federal claims. We find more daunting, however, the prospect that
parties to a transaction may never know whether they are covered by the Acts
until they engage in extended discovery and litigation over a concept as often
elusive as the passage of control. Accord, Golden v. Garafalo, 678 F.2d, at
1145-1146 (CA2 1982).

V
30

In sum, we conclude that the stock at issue here is a "security" within the
definition of the Acts, and that the sale of business doctrine does not apply. The
judgment of the United States Court of Appeals for the Ninth Circuit is
therefore

31

Reversed.

32

Justice STEVENS, dissenting. *

33

In my opinion, Congress did not intend the antifraud provisions of the federal
securities laws to apply to every transaction in a security described in 2(1) of
the 1933 Act:1

34

"The term 'security' means any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profitsharing agreement, . . . investment contract, voting-trust certificate, . . . or, in
general, any interest or instrument commonly known as a 'security.' " 15 U.S.C.
77b(1).

35

See also ante, at 686, n. 1. Congress presumably adopted this sweeping

definition "to prevent the financial community from evading regulation by
inventing new types of financial instruments rather than to prevent the courts
from interpreting the Act in light of its purposes." Sutter v. Groen, 687 F.2d
197, 201 (CA7 1982). Moreover, the "broad statutory definition is preceded . . .
by the statement that the terms mentioned are not to be considered securities if
'the context otherwise requires. . . .' " Marine Bank v. Weaver, 455 U.S. 551,
556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982).

36

The legislative history of the 1933 and 1934 Securities Acts makes clear that
Congress was primarily concerned with transactions in securities that are traded
in a public market. In United Housing Foundation, Inc. v. Forman, 421 U.S.
837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), the Court observed:

37

"The primary purpose of the Acts of 1933 and 1934 was to eliminate serious
abuses in a largely unregulated securities market. The focus of the Acts is on
the capital market of the enterprise system: the sale of securities to raise capital
for profit-making purposes, the exchanges on which securities are traded, and
the need for regulation to prevent fraud and protect the interest of investors.
Because securities transactions are economic in character Congress intended
the application of these statutes to turn on the economic realities underlying a
transaction, and not on the name appended thereto." Id., at 849, 95 S.Ct., at
2059.

38

I believe that Congress wanted to protect investors who do not have access to
inside information and who are not in a position to protect themselves from
fraud by obtaining appropriate contractual warranties.

39

At some level of analysis, the policy of Congress must provide the basis for

39

At some level of analysis, the policy of Congress must provide the basis for
placing limits on the coverage of the Securities Acts. The economic realities of
a transaction may determine whether "unusual instruments" fall within the
scope of the Acts, ante, at 690, and whether an ordinary commercial "note" is
covered, ante, at 693-694. The negotiation of an individual mortgage note, for
example, surely would not be covered by the Acts, although a note is literally a
"security" under the definition. Cf. Chemical Bank v. Arthur Andersen & Co.,
726 F.2d 930, 937 (CA2), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83
L.Ed.2d 190 (1984). The marketing to the public of a large portfolio of
mortgage loans, however, might well be. See Sanders v. John Nuveen & Co.,
463 F.2d 1075, 1079-1080 (CA7), cert. denied, 409 U.S. 1009, 93 S.Ct. 443, 34
L.Ed.2d 302 (1972).

40

I believe that the characteristics of the entire transaction are as relevant in

determining whether a transaction in "stock" is covered by the Acts as they are
in transactions involving "notes," "investment contracts," or the more hybrid
securities. Providing regulations for the trading of publicly listed stock
whether on an exchange or in the over-the-counter marketwas the heart of
Congress' legislative program, and even private sales of such securities are
surely covered by the Acts. I am not persuaded, however, that Congress
intended to cover negotiated transactions involving the sale of control of a
business whose securities have never been offered or sold in any public market.
In the latter cases, it is only a matter of interest to the parties whether the
transaction takes the form of a sale of stock or a sale of assets, and the decision
usually hinges on matters that are irrelevant to the federal securities laws such
as tax liabilities, the assignability of Government licenses or other intangible
assets, and the allocation of the accrued or unknown liabilities of the going
concern. If Congress had intended to provide a remedy for every fraud in the
sale of a going concern or its assets, it would not have permitted the parties to
bargain over the availability of federal jurisdiction.

41

In short, I would hold that the antifraud provisions of the federal securities laws
are inapplicable unless the transaction involves (i) the sale of a security that is
traded in a public market; or (ii) an investor who is not in a position to
negotiate appropriate contractual warranties and to insist on access to inside
information before consummating the transaction. Of course, until the precise
contours of such a standard could be marked out in a series of litigated
proceedings, some uncertainty in the coverage of the statute would be
unavoidable. Nevertheless, I am persuaded that the interests in certainty and
predictability that are associated with a simple "bright-line" rule are not strong
enough to "justify expanding liability to reach substantive evils far outside the
scope of the legislature's concern."2 Sutter v. Groen, 687 F.2d, at 202.

42

Both of these cases involved a sale of stock in a closely-held corporation. In

each case the transaction was preceded by comprehensive negotiations between
the buyer and seller. There is no suggestion that the buyers were unable to
obtain appropriate warranties or to insist on the exchange and independent
evaluation of relevant financial information before entering into the
transactions.3 I do not believe Congress intended the federal securities laws to
govern the private sale of a substantial ownership interest in these operating
businesses simply because the transactions were structured as sales of stock
instead of assets.

43

I would affirm the judgment of the Court of Appeals in No. 83-1961 and
reverse the judgment in No. 84-165.

We have repeatedly ruled that the definitions of "security" in 3(a)(10) of the

1934 Act and 2(1) of the 1933 Act are virtually identical and will be treated
as such in our decisions dealing with the scope of the term. Marine Bank v.
Weaver, 455 U.S. 551, 555, n. 3, 102 S.Ct. 1220, 1223, n. 3, 71 L.Ed.2d 409
(1982); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 847, n. 12,
95 S.Ct. 2051, 2058, n. 12, 44 L.Ed.2d 621 (1975).

Although we did not so specify in Forman, we wish to make clear here that
these characteristics are those usually associated with common stock, the kind
of stock often at issue in cases involving the sale of a business. Various types of
preferred stock may have different characteristics and still be covered by the
Acts.

Professor Loss suggests that the statutory analysis is sufficient. L. Loss,

Fundamentals of Securities Regulation 212 (1983). See infra, at 693-694.

Respondents also rely on Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19
L.Ed.2d 564 (1967), and Marine Bank v. Weaver, 455 U.S. 551, 102 S.Ct.
1220, 71 L.Ed.2d 409 (1982), as support for their argument that we have
mandated in every case a determination of whether the economic realities of a
transaction call for the application of the Acts. It is sufficient to note here that
these cases, like the other cases on which respondents rely, involved unusual
instruments that did not fit squarely within one of the enumerated specific kinds
of securities listed in the definition. Tcherepnin involved withdrawable capital
shares in a state savings and loan association, and Weaver involved a certificate
of deposit and a privately negotiated profit sharing agreement. See Marine
Bank v. Weaver, supra, at 557, n. 5, 102 S.Ct., at 1224, n. 5, for an explanation
of why the certificate of deposit involved there did not fit within the definition's

category "certificate of deposit, for a security."

5

In support of their contention that the Court has mandated use of the Howey test
whenever it determines whether an instrument is a "security," respondents
quote our statement in Teamsters v. Daniel, 439 U.S. 551, 558, n. 11, 99 S.Ct.
790, 795, n. 11, 58 L.Ed.2d 808 (1979), that the Howey test " 'embodies the
essential attributes that run through all of the Court's decisions defining a
security' " (quoting Forman, 421 U.S., at 852, 95 S.Ct., at 2060). We do not
read this bit of dicta as broadly as respondents do. We made the statement in
Forman in reference to the purchasers' argument that if the instruments at issue
were not "stock" and were not "investment contracts," at least they were
"instrument[s] commonly known as a 'security' " within the statutory definition.
We stated, as part of our analysis of whether the instruments were "investment
contracts," that we perceived "no distinction, for present purposes, between an
'investment contract' and an 'instrument commonly known as a "security." ' "
Ibid. (emphasis added). This was not to say that the Howey test applied to any
case in which an instrument was alleged to be a security, but only that once the
label "stock" did not hold true, we perceived no reason to analyze the case
differently whether we viewed the instruments as "investment contracts" or as
falling within another similarly general category of the definitionan
"instrument commonly known as a 'security.' " Under either of these general
categories, the Howey test would apply.

In criticizing the sale of business doctrine, Professor Loss agrees. He considers

that the doctrine "comes dangerously close to the heresy of saying that the
fraud provisions do not apply to private transactions; for nobody, apparently,
has had the temerity to argue that the sale of a publicly owned business for
stock of the acquiring corporation that is distributed to the shareholders of the
selling corporation as a liquidating dividend does not involve a security." L.
Loss, Fundamentals of Securities Regulation 212 (1983) (emphasis in original)
(footnote omitted).

Justice STEVENS dissents on the ground that Congress did not intend the
antifraud provisions of the federal securities laws to apply to "the private sale of
a substantial ownership interest in [a business] simply because the transactio[n]
w[as] structured as [a] sal[e] of stock instead of assets." Post, at 700. Justice
STEVENS, of course, is correct in saying that it is clear from the legislative
history of the 1933 and 1934 Acts that Congress was concerned primarily with
transactions "in securities . . . traded
in a public market." Post, at 698. United Housing Foundation, Inc. v. Forman,
421 U.S., at 849, 95 S.Ct., at 2059. It also is true that there is no indication in
the legislative history that Congress considered the type of transactions

involved in this case and in Gould v. Ruefenacht, 471 U.S. 701, 105 S.Ct. 2308,
85 L.Ed.2d 708 (1985).
The history is simply silentas it is with respect to other transactions to which
these Acts have been applied by the Securities and Exchange Commission and
judicial interpretation over the half century since this legislation was adopted.
One only need mention the expansive interpretation of 10(b) of the 1934 Act
and Rule 10b-5 adopted by the Commission. What the Court said in Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539
(1975), is relevant:
"When we deal with private actions under Rule 10b-5, we deal with a judicial
oak which has grown from little more than a legislative acorn. Such growth
may be quite consistent with the congressional enactment and with the role of
the federal judiciary in interpreting it, see J.I. Case Co. v. Borak, [377 U.S. 426,
84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) ], but it would be disingenuous to suggest
that either Congress in 1934 or the Securities and Exchange Commission in
1942 foreordained the present state of the law with respect to Rule 10b-5. It is
therefore proper that we consider, in addition to the factors already discussed,
what may be described as policy considerations when we come to flesh out the
portions of the law with respect to which neither the congressional enactment
nor the administrative regulations offer conclusive guidance." Id., at 737, 95
S.Ct., at 1926.
See also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196-197, 96 S.Ct. 1375,
1382-1383, 47 L.Ed.2d 668 (1976).
In this case, unlike with respect to the interpretation of 10(b) in Blue Chip
Stamps, we have the plain language of 2(1) of the 1933 Act in support of our
interpretation. In Forman, supra, we recognized that the term "stock" is to be
read in accordance with the common understanding of its meaning, including
the characteristics identified in Forman. See supra, at 686. In addition, as stated
in Blue Chip Stamps, supra, it is proper for a court to consideras we do today
policy considerations in construing terms in these Acts.
*

This opinion applies also to No. 84-165, Gould v. Ruefenacht et al., 471 U.S.
701, 105 S.Ct. 2308, 85 L.Ed.2d 708 (1985).

Cf. Milnarik v. M-S Commodities, Inc., 457 F.2d 274, 275-276 (CA7) (Stevens,
J., for the court) ("we do not believe every conceivable arrangement that would
fit a dictionary definition of an investment contract was intended to be included
within the statutory definition of a security"), cert. denied, 409 U.S. 887, 93
S.Ct. 113, 34 L.Ed.2d 144 (1972).

In final analysis, the Court relies on its own evaluation of the relevant "policy
considerations." See ante, at 694-697, and especially n. 7. While I agree that
policy considerations are relevant in construing the Securities Acts, I would
prefer to rely principally on the policies of Congress as reflected in the
legislative history. If extrinsic considerations are to be given effect, I would
place a far different evaluation on the weight of the conflicting policies,
because I strongly believe that this Court should presume that federal
legislation is not intended to displace state authority unless Congress has
plainly indicated an intent to do so. See e.g., Bennett v. New Jersey, 470 U.S.
632, 654-655, n. 16, 105 S.Ct. 1555, 1568, n. 16, 84 L.Ed.2d 572 (1985)
(STEVENS, J., dissenting); Garcia v. United States, 469 U.S. 70, 89-90, 105
S.Ct. 479, 489-490, 83 L.Ed.2d 472 (1984) (STEVENS, J., dissenting);
Michigan v. Long, 463 U.S. 1032, 1067, 103 S.Ct. 3469, 3490, 77 L.Ed.2d
1201 (1983) (STEVENS, J., dissenting); United States v. Altobella, 442 F.2d
310, 316 (CA7 1971) (Stevens, J., for the court). Cf. Minnesota v. Clover Leaf
Creamery Co., 449 U.S. 456, 477, 101 S.Ct. 715, 730, 66 L.Ed.2d 659 (1981)
(STEVENS, J., dissenting).

Indeed, in No. 83-1961, the parties entered into a lengthy Stock Purchase
Agreement containing extensive warranties and other protections for the
purchasers. App. 206-263.