SEC v. ETS Payphones, Inc.

United States Court of Appeals for the Eleventh Circuit · 2002 · Corporations

300 F.3d 1281 (11th Cir. 2002)

Updated August 22, 2026

CorporationsSecuritiesInvestment ContractsSubject Matter Jurisdictioninvestment contractHoweyFormanprofits

Facts

Investors purchased pay telephones indirectly from PSA, a wholly owned subsidiary of ETS, and then leased the phones back to ETS for management in exchange for a fixed monthly fee. Investors could require ETS to repurchase the phones at a prearranged price if dissatisfied, or cancel the lease and repossess the phones without penalty. ETS later filed for bankruptcy, stopped making lease payments, and ceased honoring the buyback guarantees. The SEC alleged the overall arrangement constituted an investment contract, but Edwards had not registered the transactions with the SEC.

Issue

Whether ETS's payphone sale-and-leaseback arrangements were "investment contracts" and therefore securities under the federal securities laws, giving the district court subject matter jurisdiction over the SEC's enforcement action. More specifically, the question was whether the arrangements satisfied the Howey requirement of an expectation of profits derived solely from the efforts of others.

Rule

Under Howey, an investment contract exists only if there is (1) an investment of money, (2) in a common enterprise, and (3) an expectation of profits to be derived solely from the efforts of others. For purposes of the federal securities laws, "profits" means either capital appreciation or participation in earnings; a contractually guaranteed fixed return that is owed regardless of the enterprise's actual earnings is not "profits" in that sense, and such a return is not derived solely from the efforts of others.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Phoenix, Nora Kim buys several automated photo booths from Desert Vista Imaging, LLC for $40,000. In the same transaction, she leases the booths back to Desert Vista, which promises to maintain them and pay her $900 per month for three years regardless of how much revenue the booths generate.

Under the majority opinion's reasoning, is Nora most likely holding an investment contract?

Explanation. The majority treated "profits" narrowly, following Forman: profits means capital appreciation or participation in earnings. A fixed monthly payment owed regardless of actual business performance is neither. The return comes from the contractually promised payment, not from sharing in the enterprise's earnings, so the Howey profits prong is not satisfied.