Reversing a district court decision, the Eleventh Circuit Court of Appeals found that partnership interests in 18 registered limited liability partnerships (RLLPs) engaged in the business of buying, collecting and reselling credit card debt were “investment contracts,” and thus, “securities” for purposes of the registration and anti-fraud provisions of the Securities Act of 1933 and the Exchange Act of 1934.

Defendants argued that the partnership interests in the RLLPs were not “securities” and were not subject to regulation under the federal securities laws because the purchasers had the power to actively participate in the management of the RLLPs. After applying the factors established in Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), to determine whether interests in the RLLPs constituted “investment contracts” under the federal securities laws, the Circuit Court rejected defendants’ position.

Based on its analysis, the Circuit Court found, among other things, that, because the purchasers (i) from the inception, and notwithstanding the language of the partnership agreements, had virtually no control over management of the RLLPs; (ii) did not have any experience in the specialized credit card debt business that would enable them to effectively manage the RLLPs; and (iii) were entirely dependent on the expertise of others with respect to management of the RLLPs, their partnership interests were “investment contracts.” After ruling that the defendants had violated the registration provisions of the securities laws, the Circuit Court remanded the case to the District Court for a determination as to whether the defendants’ sale of the partnership interests violated Section 10(b) of the 1934 Act or Section 17(a) of the 1933 Act. (SEC v. Merchant Capital LLC, 2007 WL 983082 (11th Cir. Apr. 4, 2007))