## Facts

- The Securities and Exchange Commission (SEC) sued McDonald Investment Company, a Minnesota corporation, and its principal seeking to enjoin unregistered offers and sales of securities under the Securities Act of 1933.
- McDonald Investment Company was incorporated in Minnesota and maintained its only business office, books, and records in Rush City, Minnesota.
- The company registered a $4,000,000 offering of installment notes under Minnesota law, stating that sales would be made only to Minnesota residents.
- Purchasers received only the company’s general unsecured debt obligation and had no ownership interest in, or direct participation in, the mortgages or liens taken on the company’s loans.
- The offering proceeds were used primarily to make loans to land developers located outside Minnesota (including Arizona), secured by mortgages or other liens held by the company.
- The company’s revenue depended largely on interest earned from these out-of-state loans and on the success of the out-of-state development projects.
- Defendants acknowledged that interstate mails would be used in connection with the offering and that prior similar offerings had occurred without SEC registration.

## Issues

1. Whether an issuer qualifies for the Securities Act § 3(a)(11) intrastate offering exemption when securities are sold only to in-state residents but the issuer’s income-producing business and use of proceeds are predominantly out of state.
2. Whether the SEC was entitled to a permanent injunction to prevent further unregistered offers and sales of the installment notes.

## Decision

- The court held that the installment note offering did not qualify for the § 3(a)(11) intrastate exemption.
- The court concluded that limiting sales to Minnesota residents was insufficient because the issuer’s income-producing activities and the enterprise funded by the offering were predominantly out of state.
- The court granted injunctive relief, enjoining further unregistered offers and sales of the notes.

## Legal Principles

- Section 3(a)(11) is construed narrowly; the exemption requires both (1) offers and sales solely to residents of a single state and (2) that the issuer’s principal income-producing business be conducted within that state.
- Courts assess the economic substance of the transaction, including the use of proceeds and where the business generating returns is carried out, rather than relying only on formal in-state incorporation, office location, or in-state investor status.
- An offering that finances out-of-state ventures, where profits depend on out-of-state operations, is interstate in character and generally requires federal registration absent another applicable exemption.

## Conclusion

Because McDonald Investment Company’s note proceeds funded loans and development activity outside Minnesota and the company’s profitability depended on those out-of-state ventures, the offering was not “intrastate” for purposes of § 3(a)(11); the court therefore enjoined further unregistered offers and sales.


Sec. & Exch. Comm’n v. McDonald Inv. Co., 343 F. Supp. 343 (D. Minn. 1972)