Robinson v. Glynn
349 F.3d 166 (4th Cir.2003).

Glynn started GeoPhone Corporation and later converted it to an LLC. He needed to raise capital, so he reached out to Robinson, who agreed to loan $1 million for a field test. If it was successful using CAMA technology, Robinson would invest up to $25 million.

  • Glynn ran the field test but didn’t use the CAMA technology.
  • Nevertheless, he still told Robinson that it was a success, and the two continued with their agreement:
    • Robinson received 33,333 of GeoPhone’s 133,333 shares, was named treasurer, and was appointed to the board of managers and the company’s executive committee.
  • Robinson sued when he later found out that CAMA wasn’t used in the field test.
    • He claimed violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5.
    • Robinson argued that his membership interest qualified as either an investment contract or stock under the Securities Acts.
      • Securities fraud is much easier under the Acts than it is under state law.

The district court found that Robinson’s membership interest was not a security within the meaning of the federal security laws.

Did Robinson’s membership interest qualify as either an “investment contract” or “stock” under the Securities Acts?

No. Affirmed.

  • To hold otherwise would unjustifiably expand the scope of the federal securities laws by treating an ordinary commercial venture as an investment contract.


(1) Investment Contract:

  • The Supreme Court has defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
    • Note: This standard has relaxed, and the word “solely” has since been omitted.
  • To determine whether an investment scheme may qualify as investment contract, the court looked into the economic reality of the situation:
    • “The question is whether an investor, as a result of the investment agreement itself or the factual circumstances that surround it, is left unable to exercise meaningful control over his investment.”
  • Here, the economic reality is that Robinson was not a passive investor relying on the efforts of others, but a knowledgeable executive actively protecting his interest and position in the company.

(2) Stock:

  • The characteristics typically associated with common stock are

(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.

  • Here, Robinson’s membership interest lacked several of these characteristics.

Rule: Where an investor has a level of control that allows him to actively protect his interest, which is inconsistent with passive investment, his interest does NOT qualify as an investment contract and thus is not within definition of “security” under federal securities laws.