Question

42-9. Definition of a Security. In 1997, Scott and Sabrina Levine formed Friendly Power Co. (FPC) and Friendly Power Franchise Co. (FPC-Franchise). FPC obtained a license to operate as a utility company in California. FPC granted FPC-Franchise the right to pay commissions to “operators” who converted residential customers to FPC. Each operator paid for a “franchise”—a geographic area, determined by such factors as the number of households and competition from other utilities. In exchange for 50 percent of FPC’s net profits on sales to residential customers in its territory, each franchise was required to maintain a 5 percent market share of power customers in that territory. Franchises were sold to telemarketing firms, which solicited customers. The telemarketers sold interests in each franchise to between fifty and ninety-four A-4 APPENDIX A: ALTERNATE CASE PROBLEMS—CHAPTER 42“partners,” each of whom invested money. FPC began supplying electricity to its customers in May 1998. Less than three months later, the Securities and Exchange Commission (SEC) filed a suit in a federal district court against the Levines and others, alleging that the “franchises” were unregistered securities offered for sale to the public in violation of the Securities Act of 1933. What is the definition of a security? Should the court rule in favor of the SEC? Why or why not? [SEC v. Friendly Power Co., LLC, 49 F.Supp.2d 1363 (S.D.Fla. 1999)]

Answer 1

Answer:

Definition of security:

Security can be defined as the financial assets which can be traded in to the financial markets. Security can be traded in the form of certificate or in an electronic form. A security can be any note promising the investor for the repayment of the particular amount, treasury stock, debenture, and certificate of interest or participation in any profit sharing agreement, bond, and certificate of indebtedness, transferable share, pre organisation certificate or subscription, investment contract.

The court should rule in favour of SEC since FPC has violated the law of ‘Securities act of 1993’ and had not registered their franchise with the securities and exchange commission and as per the the ‘securities act of 1993’, selling of unregistered securities to the public is against law. Under such circumstances, FPC will be held guilty of selling the unregistered securities to the public which is against the law.