SECURITIES AND EXCHANGE COMMISSION v. EDWARDS

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SECURITIES AND EXCHANGE COMMISSION v.
EDWARDS
certiorari to the united states court of appeals for
the eleventh circuit
No. 02–1196. Argued November 4, 2003—Decided January 13, 2004
Respondent was the chairman, chief executive officer, and sole shareholder
of ETS Payphones, Inc., which sold payphones to the public via inde-
pendent distributors. The payphones were offered with an agreement
under which ETS leased back the payphone from the purchaser for a
fixed monthly payment, thereby giving purchasers a fixed 14% annual
return on their investment. Although ETS’ marketing materials trum-
peted the “incomparable pay phone” as “an exciting business opportu-
nity,” the payphones did not generate enough revenue for ETS to make
the payments required by the leaseback agreements, so the company
depended on funds from new investors to meet its obligations. After
ETS filed for bankruptcy protection, the Securities and Exchange Com-
mission (SEC) brought this civil enforcement action, alleging, among
other things, that respondent and ETS had violated registration re-
quirements and antifraud provisions of the Securities Act of 1933 and
the Securities Exchange Act of 1934, and Rule 10b–5 thereunder. The
District Court concluded that the sale-and-leaseback arrangement was
an “investment contract” within the meaning of, and therefore subject
to, the federal securities laws. The Eleventh Circuit reversed, holding
that (1) this Court’s opinions require an “investment contract” to offer
either capital appreciation or a participation in an enterprise’s earnings,
and thus exclude schemes offering a fixed rate of return; and (2) those
opinions’ requirement that the return on the investment be derived
solely from the efforts of others was not satisfied when the purchasers
had a contractual entitlement to the return.
Held: An investment scheme promising a fixed rate of return can be an
“investment contract” and thus a “security” subject to the federal secu-
rities laws. Section 2(a)(1) of the 1933 Act and § 3(a)(10) of the 1934
Act define “security” to include an “investment contract,” but do not
define “investment contract.” This Court has established that the test
for determining whether a particular scheme is an investment contract
is “whether the scheme involves an investment of money in a common
enterprise with profits to come solely from the efforts of others.” SEC
v. W. J. Howey Co., 328 U. S. 293, 301. This definition embodies a flexi-
ble, rather than a static, principle that is capable of adaptation to meet

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the countless and variable schemes devised by those seeking to use oth-
ers’ money on the promise of profits. Id., at 299. The profits this
Court was speaking of in Howey are profits—in the sense of the income
or return—that investors seek on their investment, not the profits of
the scheme in which they invest, and may include, for example, divi-
dends, other periodic payments, or the increased value of the invest-
ment. There is no reason to distinguish between promises of fixed re-
turns and promises of variable returns for purposes of the test, so
understood. In both cases, the investing public is attracted by repre-
sentations of investment income. Moreover, investments pitched as
low risk (such as those offering a “guaranteed” fixed return) are particu-
larly attractive to individuals more vulnerable to investment fraud, in-
cluding older and less sophisticated investors. Under the reading re-
spondent advances, unscrupulous marketers of investments could evade
the securities laws by picking a rate of return to promise. This Court
will not read into the securities laws a limitation not compelled by the
language that would so undermine the laws’ purposes. Respondent’s
claim that including investment schemes promising a fixed return among
investment contracts conflicts with precedent is mistaken, as no distinc-
tion between fixed and variable returns was drawn in the blue sky law
cases that the Howey Court relied on, and no post-Howey decision is to
the contrary, see United Housing Foundation, Inc. v. Forman, 421 U. S.
837, 852–853. Dictum suggesting otherwise in Reves v. Ernst & Young,
494 U. S. 56, 68, n. 4, was incorrect. The SEC has consistently main-
tained that a promise of a fixed return does not preclude a scheme from
being an investment contract. The Eleventh Circuit’s alternative hold-
ing, that respondent’s scheme falls outside the definition because pur-
chasers had a contractual entitlement to a return, is incorrect and incon-
sistent with this Court’s precedent. Pp. 393–397.
300 F. 3d 1281, reversed and remanded.
O’Connor, J., delivered the opinion for a unanimous Court.
Solicitor General Olson argued the cause for petitioner.
With him on the briefs were Deputy Solicitor General
Kneedler, Matthew D. Roberts, Meyer Eisenberg, Jacob H.
Stillman, and Susan S. McDonald.
Michael K. Wolensky argued the cause for respondent.
With him on the brief was Ethan H. Cohen.*
*Briefs of amici curiae urging reversal were filed for AARP by Stacy
Canan, Deborah M. Zuckerman, and Michael R. Schuster; for the North
American Securities Administrators Association, Inc., by Mark J. Davis;

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Justice O’Connor delivered the opinion of the Court.
“Opportunity doesn’t always knock . . . sometimes it
rings.” App. 113 (ETS Payphones promotional brochure).
And sometimes it hangs up. So it did for the 10,000 people
who invested a total of $300 million in the payphone sale-
and-leaseback arrangements touted by respondent under
that slogan. The Securities and Exchange Commission
(SEC) argues that the arrangements were investment con-
tracts, and thus were subject to regulation under the federal
securities laws. In this case, we must decide whether a
moneymaking scheme is excluded from the term “investment
contract” simply because the scheme offered a contractual
entitlement to a fixed, rather than a variable, return.
I
Respondent Charles Edwards was the chairman, chief ex-
ecutive officer, and sole shareholder of ETS Payphones, Inc.
(ETS).† ETS, acting partly through a subsidiary also con-
trolled by respondent, sold payphones to the public via inde-
pendent distributors. The payphones were offered pack-
aged with a site lease, a 5-year leaseback and management
agreement, and a buyback agreement. All but a tiny frac-
tion of purchasers chose this package, although other man-
agement options were offered. The purchase price for the
payphone packages was approximately $7,000. Under the
leaseback and management agreement, purchasers received
$82 per month, a 14% annual return. Purchasers were not
involved in the day-to-day operation of the payphones they
owned. ETS selected the site for the phone, installed the
for the Public Investors Arbitration Bar Association, Inc., by Joseph C.
Long; and for Securities Regulators for the State of Florida et al. by
Cynthia K. Maynard.
†Because the Court of Appeals ordered the complaint dismissed, we
treat the case as we would an appeal from a successful motion to dismiss
and accept as true the allegations in the complaint. SEC v. Zandford, 535
U. S. 813, 818 (2002); Saudi Arabia v. Nelson, 507 U. S. 349, 351, 354 (1993).

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equipment, arranged for connection and long-distance serv-
ice, collected coin revenues, and maintained and repaired the
phones. Under the buyback agreement, ETS promised to
refund the full purchase price of the package at the end of
the lease or within 180 days of a purchaser’s request.
In its marketing materials and on its Web site, ETS trum-
peted the “incomparable pay phone” as “an exciting business
opportunity,” in which recent deregulation had “open[ed] the
door for profits for individual pay phone owners and opera-
tors.” According to ETS, “[v]ery few business opportunities
can offer the potential for ongoing revenue generation that is
available in today’s pay telephone industry.” App. 114–115
(ETS brochure); id., at 227 (ETS Web site); see id., at 13
(Complaint ¶¶ 37–38).
The payphones did not generate enough revenue for ETS
to make the payments required by the leaseback agreements,
so the company depended on funds from new investors to
meet its obligations. In September 2000, ETS filed for
bankruptcy protection. The SEC brought this civil enforce-
ment action the same month. It alleged that respondent
and ETS had violated the registration requirements of
§§ 5(a) and (c) of the Securities Act of 1933, 68 Stat. 684, 15
U. S. C. §§ 77e(a), (c), the antifraud provisions of both § 17(a)
of the Securities Act of 1933, 114 Stat. 2763A–452, 15 U. S. C.
§ 77q(a), and § 10(b) of the Securities Exchange Act of 1934,
48 Stat. 891, as amended, 114 Stat. 2763A–454, 15 U. S. C.
§ 78j(b), and Rule 10b–5 thereunder, 17 CFR § 240.10b–5
(2003). The District Court concluded that the payphone
sale-and-leaseback arrangement was an investment contract
within the meaning of, and therefore was subject to, the
federal securities laws. SEC v. ETS Payphones, Inc., 123
F. Supp. 2d 1349 (ND Ga. 2000). The Court of Appeals re-
versed. 300 F. 3d 1281 (CA11 2002) (per curiam). It held
that respondent’s scheme was not an investment contract, on
two grounds. First, it read this Court’s opinions to require
that an investment contract offer either capital appreciation

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or a participation in the earnings of the enterprise, and thus
to exclude schemes, such as respondent’s, offering a fixed
rate of return. Id., at 1284–1285. Second, it held that our
opinions’ requirement that the return on the investment be
“derived solely from the efforts of others” was not satisfied
when the purchasers had a contractual entitlement to the
return. Id., at 1285. We conclude that it erred on both
grounds.
II
“Congress’ purpose in enacting the securities laws was to
regulate investments, in whatever form they are made and
by whatever name they are called.” Reves v. Ernst &
Young, 494 U. S. 56, 61 (1990). To that end, it enacted a
broad definition of “security,” sufficient “to encompass virtu-
ally any instrument that might be sold as an investment.”
Ibid. Section 2(a)(1) of the 1933 Act, 15 U. S. C. § 77b(a)(1),
and § 3(a)(10) of the 1934 Act, 15 U. S. C. § 78c(a)(10), in
slightly different formulations which we have treated as es-
sentially identical in meaning, Reves, supra, at 61, n. 1, define
“security” to include “any note, stock, treasury stock, secu-
rity future, bond, debenture, . . . investment contract, . . . [or
any] instrument commonly known as a ‘security.’ ” “Invest-
ment contract” is not itself defined.
The test for whether a particular scheme is an investment
contract was established in our decision in SEC v. W. J.
Howey Co., 328 U. S. 293 (1946). We look to “whether the
scheme involves an investment of money in a common enter-
prise with profits to come solely from the efforts of others.”
Id., at 301. This definition “embodies a flexible rather than
a static principle, one that is capable of adaptation to meet
the countless and variable schemes devised by those who
seek the use of the money of others on the promise of
profits.” Id., at 299.
In reaching that result, we first observed that when Con-
gress included “investment contract” in the definition of se-
curity, it “was using a term the meaning of which had been

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crystallized” by the state courts’ interpretation of their
“ ‘blue sky’ ” laws. Id., at 298. (Those laws were the pre-
cursors to federal securities regulation and were so named,
it seems, because they were “aimed at promoters who ‘would
sell building lots in the blue sky in fee simple.’ ” 1 L. Loss &
J. Seligman, Securities Regulation 36, 31–43 (3d ed. 1998)
(quoting Mulvey, Blue Sky Law, 36 Can. L. Times 37 (1916)).)
The state courts had defined an investment contract as
“a contract or scheme for ‘the placing of capital or laying out
of money in a way intended to secure income or profit from
its employment,’ ” and had “uniformly applied” that defini-
tion to “a variety of situations where individuals were led to
invest money in a common enterprise with the expectation
that they would earn a profit solely through the efforts of
the promoter or [a third party].” Howey, supra, at 298
(quoting State v. Gopher Tire & Rubber Co., 146 Minn. 52,
56, 177 N. W. 937, 938 (1920)). Thus, when we held that
“profits” must “come solely from the efforts of others,” we
were speaking of the profits that investors seek on their in-
vestment, not the profits of the scheme in which they invest.
We used “profits” in the sense of income or return, to include,
for example, dividends, other periodic payments, or the in-
creased value of the investment.
There is no reason to distinguish between promises of
fixed returns and promises of variable returns for purposes
of the test, so understood. In both cases, the investing pub-
lic is attracted by representations of investment income, as
purchasers were in this case by ETS’ invitation to “ ‘watch
the profits add up.’ ” App. 13 (Complaint ¶ 38). Moreover,
investments pitched as low risk (such as those offering a
“guaranteed” fixed return) are particularly attractive to indi-
viduals more vulnerable to investment fraud, including older
and less sophisticated investors. See 2 S. Rep. No. 102–261,
App., p. 326 (1992) (Staff Summary of Federal Trade Com-
mission Activities Affecting Older Consumers). Under the
reading respondent advances, unscrupulous marketers of in-

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vestments could evade the securities laws by picking a rate
of return to promise. We will not read into the securities
laws a limitation not compelled by the language that would
so undermine the laws’ purposes.
Respondent protests that including investment schemes
promising a fixed return among investment contracts con-
flicts with our precedent. We disagree. No distinction be-
tween fixed and variable returns was drawn in the blue sky
law cases that the Howey Court used, in formulating the
test, as its evidence of Congress’ understanding of the term.
328 U. S., at 298, and n. 4. Indeed, two of those cases in-
volved an investment contract in which a fixed return was
promised. People v. White, 124 Cal. App. 548, 550–551, 12
P. 2d 1078, 1079 (1932) (agreement between defendant and
investors stated that investor would give defendant $5,000,
and would receive $7,500 from defendant one year later);
Stevens v. Liberty Packing Corp., 111 N. J. Eq. 61, 62–63, 161
A. 193, 193–194 (1932) (“ironclad contract” offered by defend-
ant to investors entitled investors to $56 per year for 10
years on initial investment of $175, ostensibly in sale and
leaseback of breeding rabbits).
None of our post-Howey decisions is to the contrary. In
United Housing Foundation, Inc. v. Forman, 421 U. S. 837
(1975), we considered whether “shares” in a nonprofit hous-
ing cooperative were investment contracts under the securi-
ties laws. We identified the “touchstone” of an investment
contract as “the presence of an investment in a common ven-
ture premised on a reasonable expectation of profits to be
derived from the entrepreneurial or managerial efforts of
others,” and then laid out two examples of investor interests
that we had previously found to be “profits.” Id., at 852.
Those were “capital appreciation resulting from the develop-
ment of the initial investment” and “participation in earnings
resulting from the use of investors’ funds.” Ibid. We con-
trasted those examples, in which “the investor is ‘attracted
solely by the prospects of a return’ ” on the investment, with

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housing cooperative shares, regarding which the purchaser
“is motivated by a desire to use or consume the item pur-
chased.” Id., at 852–853 (quoting Howey, supra, at 300).
Thus, Forman supports the commonsense understanding of
“profits” in the Howey test as simply “financial returns on . . .
investments.” 421 U. S., at 853.
Concededly, Forman’s illustrative description of prior de-
cisions on “profits” appears to have been mistaken for an
exclusive list in a case considering the scope of a different
term in the definition of a security, “note.” See Reves, 494
U. S., at 68, n. 4. But that was a misreading of Forman, and
we will not bind ourselves unnecessarily to passing dictum
that would frustrate Congress’ intent to regulate all of the
“countless and variable schemes devised by those who seek
the use of the money of others on the promise of profits.”
Howey, supra, at 299.
Given that respondent’s position is supported neither by
the purposes of the securities laws nor by our precedents, it
is no surprise that the SEC has consistently taken the oppo-
site position, and maintained that a promise of a fixed return
does not preclude a scheme from being an investment con-
tract. It has done so in formal adjudications, e. g., In re Ab-
bett, Sommer & Co., 44 S. E. C. 104 (1969) (holding that mort-
gage notes, sold with a package of management services and
a promise to repurchase the notes in the event of default,
were investment contracts); see also In re Union Home
Loans (Dec. 16, 1982), 26 S. E. C. Docket 1517, 1519 (report
and order regarding settlement, stating that sale of promis-
sory notes secured by deeds of trust, coupled with manage-
ment services and providing investors “a specified percent-
age return on their investment,” were investment contracts),
and in enforcement actions, e. g., SEC v. Universal Service
Assn., 106 F. 2d 232, 234, 237 (CA7 1939) (accepting SEC’s
position that an investment scheme promising “assured profit
of 30% per annum with no chance of risk or loss to the con-
tributor” was a security because it satisfied the pertinent

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substance of the Howey test, “ ‘[t]he investment of money
with the expectation of profit through the efforts of other
persons’ ”); see also SEC v. American Trailer Rentals Co.,
379 U. S. 594, 598 (1965) (noting that “the SEC advised” the
respondent that its “sale and lease-back arrangements,” in
which investors received “a set 2% of their investment per
month for 10 years,” “were investment contracts and there-
fore securities” under the 1933 Act).
The Eleventh Circuit’s perfunctory alternative holding,
that respondent’s scheme falls outside the definition because
purchasers had a contractual entitlement to a return, is in-
correct and inconsistent with our precedent. We are consid-
ering investment contracts. The fact that investors have
bargained for a return on their investment does not mean
that the return is not also expected to come solely from the
efforts of others. Any other conclusion would conflict with
our holding that an investment contract was offered in
Howey itself. 328 U. S., at 295–296 (service contract entitled
investors to allocation of net profits).
We hold that an investment scheme promising a fixed rate
of return can be an “investment contract” and thus a “secu-
rity” subject to the federal securities laws. The judgment
of the United States Court of Appeals for the Eleventh Cir-
cuit is reversed, and the case is remanded for further pro-
ceedings consistent with this opinion.
It is so ordered.