The opinion of the court was delivered by: STEWART
The Securities and Exchange Commission ("SEC") has filed a complaint charging the defendants, Energy Group of America ("EGA") and its president and sole stockholder, Edwin G. Axel ("Axel"), with violations of various provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and rules promulgated thereunder. The SEC seeks an injunction against the continuing sale and offering for sale of unregistered securities, an injunction against fraudulent practices connected therewith, disgorgement of monies already realized from those practices, and, pending trial on the merits, a preliminary injunction, which is the subject of this opinion.
EGA solicits customers, through advertising and direct mailing, to utilize its services in connection with oil and gas lease lotteries conducted by the Department of the Interior, Bureau of Land Management ("BLM"). Oil and gas leases are awarded by BLM by two methods: when the lease pertains to land that is located on a geologic structure known to be oil or gas-producing, the lease is awarded by competitive bidding; on other lands, that is, lands not on a geologic structure which contains a producing oil or gas field, ten-year leases are awarded on a non-competitive basis at an annual rental of one dollar per acre per year. The relatively low rental and the oil and gas producing potential of the lands generate a high demand for the non-competitive leases, so much so that BLM awards the leases through a public drawing, or lottery, known as the Simultaneous Oil and Gas Lease Filing System. A monthly listing of leases available in each state is published by BLM, and for a ten-dollar entry fee, members of the public may participate in the drawing. The winner of a lease, if he or she wishes to retain the lease, must pay in advance the first year's rental, and thereafter pay the annual rental as it falls due. The lease may be sold or assigned and a royalty of up to 5% Retained. The federal government receives a 12.5% Royalty on production, regardless of whether the lease is sold or assigned.
In its promotional literature, EGA explains the BLM leasing program, stresses the potential windfall awaiting a winner of a lease, and represents that it possesses expertise in selecting which of the parcels offered by BLM warrants a bid. EGA confines its recommendations to Wyoming and New Mexico parcels, states in which EGA claims to have its best research resources. For a ten-dollar fee, EGA offers the following services to its customers:
1. A monthly listing of parcels it expects to be subject to BLM public drawing, based on expirations of existing ten-year leases. This is a valuable service, EGA claims, because it gives EGA customers more time to select and enter non-competitive bids on parcels than the normal five days between BLM listing and the entry deadline. If a parcel selected by a customer from EGA's list is not offered by BLM, EGA will substitute a parcel of equivalent value on the customer's application.
2. EGA claims to possess expertise in selecting parcels on which to bid, and lists in its monthly listing six to ten recommended parcels in each state, an amount that EGA will pay for each lease it recommends should that lease be won, and the expected number of applicants for each lease.
3. EGA fills out and submits the BLM entry card on behalf of the customer.
4. If a customer wins a lease, EGA pays the first year's rental, with the understanding (not a legally-enforceable agreement) that it is to be repaid when the customer sells or assigns the lease or when the property produces oil or gas.
5. EGA offers, if the customer requests the service, to notify the winner of any inquiries EGA receives concerning sale of the lease.
6. EGA stands ready to purchase the lease from the winner at the price at which it valued the lease on the monthly listing.
The SEC contends that in providing this combination of services, EGA is offering for sale and selling an unregistered "security" within the meaning of Section 2(1) of the Securities Act,
15 U.S.C. § 77b(1), and Section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10), in violation of the registration provisions, Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e. The SEC also claims that the anti-fraud provisions of that Act, 15 U.S.C. § 77q(a), and of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rules pursuant thereto, have been violated since EGA's literature is misleading in its commissions and omissions.
A hearing was held in September, 1977 to determine whether a preliminary injunction should issue. Decision on the motion for a preliminary injunction was reserved pending the submission of briefs on the question of whether EGA's promotional literature and services constitute an investment contract.
We begin with the principle that remedial legislation, such as the Securities Act and the Securities Exchange Act, should be construed broadly to effectuate its purposes. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S. Ct. 548, 19 L. Ed. 2d 564 (1967). We also recognize that the application of these statutes to a particular transaction turns not on the form but on the economic realities underlying the transaction. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849, 95 S. Ct. 2051, 2059, 44 L. Ed. 2d 621 (1975); Accord, Tcherepnin v. Knight, supra, 389 U.S. at 336, 88 S. Ct. 548; SEC v. W. J. Howey Co., 328 U.S. 293, 298, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946) ("Howey "). However, whether these statutes are to be applied to a transaction is tested not by the desirability of regulation, but by whether such application will fulfill the statutory purpose of "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'." Howey, supra, 328 U.S. at 299, 66 S. Ct. at 1103; See S. E. C. v. Variable Annuity Life Insurance Co. of America, 359 U.S. 65, 80, 79 S. Ct. 618, 3 L. Ed. 2d 640 (1959) (Brennan, J., concurring). It is noteworthy that the SEC has taken the position in its responses to requests for "no action" letters that services such as those offered by EGA do constitute investment contracts and thus are subject to the registration requirements of the securities statute and regulation by the SEC. However, while the position of the administrative agency charged with the enforcement of and promulgation of regulations under a statute is entitled to substantial weight, it is not conclusive. Zeller v. Bogue Electric Mfg. Corp., 476 F.2d 795, 800 (2d Cir. 1973). See Saxbe v. Bustos, 419 U.S. 65, 74, 95 S. Ct. 272, 42 L. Ed. 2d 231 (1974). With these principles in mind, we turn to the SEC's arguments that EGA is offering an investment contract.
The landmark Supreme Court cases which expanded the definitions of a security and an investment contract beyond their traditional embodiments, SEC v. Joiner Leasing Corp., 320 U.S. 344, 64 S. Ct. 120, 88 L. Ed. 88 (1943) ("Joiner "), and SEC v. W. J. Howey Co., supra, are relied on here by the SEC in its argument that those definitions should also encompass the offerings of EGA. The SEC's argument based on Joiner lies generally in the proposition that EGA, in its panoply of offered services, holds itself out to the public as providing more than a simple ...