The opinion of the court was delivered by: LASKER
The present motion for a preliminary injunction raises the issue of whether the selling of rare coin portfolios by Federal Coin Reserve, Inc. falls within the terms of Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1).
The Securities and Exchange Commission (SEC) filed a complaint against the Federal Coin Reserve, Inc. (FCR), its principals, Mark Rauch and Larry Corsa, and other defendants, seeking temporary and permanent injunctive relief from alleged violations by defendants of the registration and anti-fraud provisions of the Securities Act of 1933, 15 U.S.C. §§ 77e (a), 77e, and 77q(a), and the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). The SEC seeks the appointment of a receiver for FCR and the disgorgement by FCR and its principals of proceeds received from the sale of rare coin portfolios. A limited temporary restraining order was issued and an evidentiary hearing on the motion for a preliminary injunction has been held.
FCR is in the business of selling rare coin portfolios. It stimulates sales by advertising in such media as airline magazines, journals used in the medical profession and other similar outlets. It does not advertise in publications specifically addressed to amateur or professional coin collectors. In general its customers are those who have responded to its advertisements. Upon a showing of interest by a customer, FCR mails to him an elaborate advertising brochure (Plaintiff's Exhibit 4) which contains a detailed description of the procedures involved in choosing the coins and of the services rendered by FCR to its customers. It is undisputed that FCR has filed no registration statement with the SEC. FCR opposes the issuance of the preliminary injunction and the other requested relief on the ground that its business, the selling of rare coin portfolios, does not constitute an investment contracts within the meaning of Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1).
At the outset we note that the burden the SEC must meet here is less stringent than that required for the issuance of a preliminary injunction in other civil contexts. The SEC need not make a showing of irreparable injury, SEC v. General Securities Co., 216 F. Supp. 350, 352 (S.D.N.Y. 1962); 15 U.S.C. 78u(e), but must demonstrate only a probability of success on the merits, Glen-Arden Commodities Milbank, Inc. v. Costantino, 493 F.2d 1027, 1035-1036 (2d Cir. 1974), or "a strong prima facie case." SEC v. Boren, 283 F.2d 312 (2d Cir. 1960); SEC v. Broadwall Securities, Inc., 240 F. Supp. 962, 967 (S.D.N.Y. 1965). Moreover the 1933 and 1934 securities acts "must be construed not technically and restrictively, but flexibly to effectuate [their] remedial purposes." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963); accord, Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972); Tcherepnin v. Knight, 389 U.S. 332, 336, 19 L. Ed. 2d 564, 88 S. Ct. 548 (1967). As Justice Jackson stated in SEC v. C. M. Joiner Leasing Corp., 320 U.S. at 351:
"[The] reach of the Act does not stop with the obvious and commonplace. Novel, uncommon, or irregular devices, whatever they appear to be, are also reached . . ."
FCR contends that its selling of rare coin portfolios constitutes the offer and sale of commodities, not securities. It maintains that the various services offered by it in its advertising brochure are optional, rarely taken advantage of, and peripheral to its business. According to FCR, it actually sold coins, and only coins. Regardless of the nature of the ultimate sales here, FCR's analysis is not in keeping with the law because an investment contract is determinable not only by the nature of what the sellers actually sell but equally by
"what character the instrument is given . . . by the terms of offer, the plan of distribution, and the economic inducements held out to the prospect. In the enforcement of an act such as this it is not inappropriate that promoters' offerings be judged as being what they were represented to be." SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 352-353, 88 L. Ed. 88, 64 S. Ct. 120 (1943).
The Court has defined an investment contract more specifically 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." SEC v. W. J. Howey & Co., 328 U.S. 293, 298-299, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946).
The character of FCR's activities is determinable by the application of ...