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Chan v. HEI Resources, Inc.

2020 COA 87. No. 18CA1769. Federal Securities Law—Colorado Securities Act—Investment Contracts—Business Organizations—General Partnerships.

August 19, 2020


Defendants solicited thousands of investors nationwide by offering them interests in oil and gas exploration and drilling joint ventures. Interested parties were sent a joint venture agreement (JVA). Under the JVA, the joint ventures were organized as general partnerships, and the partners had significant management rights and responsibilities, and were jointly and severally liable for joint venture liabilities. Plaintiff, in his official capacity as Colorado’s securities commissioner, brought this enforcement action against defendants for violating the Colorado Securities Act (CSA) by employing unlicensed sales representatives to offer and sell unregistered securities. Plaintiff alleged that notwithstanding that the investors are designated general partners in the joint ventures, their interests are securities—specifically, investment contracts—under the CSA, and they violated the CSA when offering those interests.

In 2013, following a partial summary judgment and a trial, the trial court found that the joint venture interests were not investment contracts and therefore were not securities under the CSA. The court reached that conclusion after applying the leading case, Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), which identifies three ways in which a party can overcome a strong presumption that a general partnership interest isn’t an investment contract. Plaintiff appealed, and a prior Court of Appeals’ division reversed, concluding that the Williamson presumption doesn’t apply in an action under the CSA and the trial court erred by considering the partners’ general, rather than venture-specific, business experience under the second Williamson test. The division remanded, and on remand, the trial court first determined that the general partners’ interests were investment contracts under the second and third Williamson tests and “other economic realities.” After taking additional evidence, the court later ruled that defendants had violated the CSA, enjoined them from engaging in securities-related activities in Colorado, and ordered certain defendants to pay plaintiff restitution.

On appeal, defendants argued that the prior division erroneously departed from well-established federal securities law by rejecting the Williamson presumption. The Williamson presumption applies when general partnership interests are alleged to be investment contracts under the CSA. Where the parties’ agreement purports to give participants rights typical of those possessed by a general partner, there is a strong presumption that the general partnership interests are not investment contracts. Here, it is undisputed that the JVA gives partners partnership powers, so the presumption applies.

Defendants also contended that the division in the first appeal erred by requiring collective venture-specific experience. Under the second Williamson test, a collective lack of venture-specific experience isn’t dispositive; it is relevant, but what ultimately matters is whether the partners have sufficient collective knowledge and experience to intelligently exercise their powers.

Defendants further argued that the trial court erred by narrowly focusing on whether any of the general partners themselves possessed the skills necessary to replace the managing partner. Under the third Williamson test, the question is whether the managing partner is essentially irreplaceable, considering the nature of the venture and the managing partner’s knowledge and experience, so the trial court’s focus was too narrow.

Defendants also argued that the trial court erred by finding that the general partners’ interests are investment contracts under “other economic realities.” Although the three Williamson tests aren’t exclusive, those tests account for economic realities, and the court should consider other economic realities only if they aren’t adequately accounted for under the Williamson tests.

The judgment was reversed and the case was remanded to re-determine, consistent with this opinion, whether the joint venture interests are investment contracts.

Official Colorado Court of Appeals proceedings can be found at the Colorado Court of Appeals website.

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