In Cushing v. Cohen, Case No. A13A0736 (decided July 16, 2013), the Georgia Court of Appeals looked at whether a particular financial transaction fit within the definition of a security under Georgia law. That decision has implications for all types of business and investment structures in Georgia.

In Cushing, the principals created a “leveraged lending program,” in which a corporation they controlled pooled money borrowed from other parties with money borrowed from a bank. The corporation then loaned the money to developers. The individual investors received a promissory note in exchange for their investment.

When the developments funded by the corporation failed, the individual note holders sued for rescission and the return of their investment. They claimed that they were entitled to that remedy because their investments were securities under the Georgia Securities Act of 1973. The defendants claimed that the plaintiffs held mere promissory notes. The Georgia Court of Appeals agreed with the investors.

Under Georgia law, a security is defined as (1) an investment in a common venture with (2) a reasonable expectation of profits from the entrepreneurial or managerial efforts of someone else. Opinion, p. 11. Even though the investment was in the form of a promissory note, the individual note holders had put their investments into a common pool that was being collectively managed by the corporation. Individual note holders were looking to the corporation to lend the money to appropriate development projects to generate a return for the investors. Therefore, this structure met the definition of a security under Georgia law.

Being a “security” under Georgia law is significant because if a security is not properly registered (or exempted from registration), an investor has an automatic right to rescind and receive a return of their investment without having to prove any fault or negligence. Investors who pool their monies to fund a project may wish to consider whether or not they are creating securities under Georgia law.

The Opinion of the Georgia Court of Appeals is available at here.