Tcherepnin v. Knight

Supreme Court of the United States · 1967 · Corporations

389 U.S. 332 (1967)

Updated August 22, 2026

CorporationsSecuritiesDefinition of securitySecurities Exchange Act of 1934§ 3(a)(10)securityinvestment contractstock

Facts

Petitioners held withdrawable capital shares in City Savings Association of Chicago, an Illinois savings and loan association. They alleged that City Savings sold those shares through mailed solicitations that portrayed the association as financially strong and the shares as desirable investments while omitting material facts, including control by a person convicted of mail fraud, denial of federal insurance because of unsafe financial policies, and restrictions on withdrawals. Under Illinois law, holders of withdrawable capital shares became members of the association, had voting rights, could receive dividends declared from profits, and could transfer their shares by written assignment with delivery of the certificate or account book. The dispute turned on whether these shares were "securities" within § 3(a)(10) of the 1934 Act.

Issue

Whether a withdrawable capital share in an Illinois savings and loan association is a "security" within the meaning of § 3(a)(10) of the Securities Exchange Act of 1934. More specifically, the question was whether such shares fall within the federal definition despite their particular state-law form and characteristics.

Rule

The definition of "security" in § 3(a)(10) of the Securities Exchange Act of 1934 must be construed broadly in light of the Act's remedial purpose, with substance and economic reality controlling over form. An instrument is a security if it fits one of the statutory categories, and a withdrawable capital share may qualify as an investment contract where it involves an investment of money in a common enterprise with profits to come solely from the efforts of others; it may also qualify as stock, a certificate of interest or participation in a profit-sharing agreement, or a transferable share.

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Prairie Harbor Savings, a state-chartered association in Milwaukee, sells “member capital accounts” through mailed brochures describing them as safe opportunities to share in the institution’s success. Purchasers receive voting rights, may transfer their interests by written assignment, and receive dividends only if the association earns profits from loans selected by management.

If investors sue under the federal securities laws for alleged fraud in the mailings, what is the strongest argument that the interests are covered securities?

Explanation. The governing rule is that the definition of security under the 1934 Act is construed broadly as remedial legislation, with substance controlling over form. An instrument is covered where economic reality shows an investment of money in a common enterprise with profits tied to the efforts of management, and it may also fit listed statutory categories such as stock or transferable shares.