SEC v. Edwards

Supreme Court of the United States · 2004 · Corporations

540 U.S. 389 (2004)

Updated August 22, 2026

CorporationsSecuritiesInvestment contractsinvestment contractsecurityfixed returnHoweyprofits

Facts

Charles Edwards controlled ETS Payphones, which sold payphones to the public, usually as a package including a site lease, a 5-year leaseback and management agreement, and a buyback agreement. Purchasers paid about $7,000 and, under the leaseback and management agreement, received $82 per month, described as a 14% annual return, while ETS handled all operational aspects of the phones. ETS also promised to refund the full purchase price at the end of the lease or within 180 days of a purchaser's request. Accepting the complaint's allegations as true, the payphones did not generate enough revenue to cover ETS's obligations, and ETS depended on new investor funds until it filed for bankruptcy protection.

Issue

Whether a scheme is excluded from the term "investment contract" merely because it offers a contractual right to a fixed return rather than a variable return. Also, whether a purchaser's contractual entitlement to payment prevents the return from being considered derived solely from the efforts of others.

Rule

Under Howey, a scheme is an investment contract if it involves an investment of money in a common enterprise with profits to come solely from the efforts of others. For this purpose, "profits" means the income or return investors seek on their investment, including fixed returns as well as variable returns, and a contractual entitlement to payment does not by itself defeat the "efforts of others" requirement.

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In Phoenix, Desert Signal Solutions sold internet kiosks to retirees for $9,500 each. Buyers simultaneously signed a five-year management agreement under which Desert Signal would place, service, and operate the kiosks and would pay each buyer $110 every month regardless of kiosk revenue.

If the buyers sue under the federal securities laws, what is the strongest argument that the arrangement may qualify as an investment contract?

Explanation. The governing rule is that a scheme is not excluded from the term investment contract merely because it offers a fixed return. Profits for this purpose means the income or return investors seek on their investment, including periodic payments, not only variable appreciation or participation in earnings. Thus a fixed $110 monthly payment does not prevent the kiosk package from qualifying as an investment contract if the other elements are met.