## Facts

- Ansel and Marina Marshall raised thoroughbred racehorses, primarily for sale, and occasionally raced horses.
- In February 1973, the Marshalls made an oral arrangement with their attorney and three others: the investors would pay expenses for a horse in exchange for one-half of its race winnings.
- In June 1973, the Marshalls and J. Robert Harris executed a written contract under which Harris agreed to pay training and racing expenses for two horses through the 1974 racing season.
- In return, Harris received a fractional ownership interest in the two horses and a share of their racing “earnings” through 1974.
- The Marshalls treated the February investor arrangement and Harris’s contract as part of the same operation, including using a single bank account for expenses and deposits and discussing similar arrangements with other potential investors.
- The horses did not race until October 1973.
- Harris stopped paying expenses; the Marshalls sued for unpaid amounts due under the contract.
- Harris asserted an affirmative defense and counterclaim that the arrangement was an unregistered “security” (an investment contract) under Oregon Securities Law (ORS ch. 59) and sought rescission and recovery of his payments.

## Issues

1. Whether the contract granting Harris an interest in racehorses and their earnings, in exchange for paying training and racing expenses, was an “investment contract” and thus a “security” under ORS chapter 59.
2. If it was a security, whether the sale was exempt from registration as (a) an “isolated transaction” under ORS 59.035(2) or (b) an initial sale of securities of a “new organization” under ORS 59.035(11).
3. What remedy follows if the transaction was an unregistered, nonexempt security.

## Decision

- The Oregon Supreme Court reversed the trial court.
- The court held the arrangement was an “investment contract” and therefore a “security” under ORS chapter 59.
- The court held the transaction was not exempt from registration under either the “isolated transaction” or “new organization” exemptions.
- Harris was entitled to the statutory remedy of rescission and recovery of amounts he had paid.

## Legal Principles

- An “investment contract” exists when, in economic reality, a person invests money in a common enterprise with an expectation of profit derived substantially from the efforts of others.
- Courts look to substance over form; labeling a deal as expense-sharing or profit-sharing does not prevent it from being a security if the economic reality matches an investment contract.
- Pooling or integrating similar investor arrangements as part of an ongoing offering defeats an “isolated transaction” exemption.
- Registration exemptions under the Oregon Securities Law are construed narrowly in light of the statute’s remedial purpose to protect investors.

## Conclusion

The court treated the racehorse expense-for-earnings arrangement as an investment contract subject to Oregon securities regulation, rejected claimed registration exemptions because the sale was part of a broader investor program, and granted the investor rescission for the unregistered, nonexempt security sale.


Marshall v. Harris, 276 Or. 447, 555 P.2d 756 (Or. 1976)