## Facts

- Merchant Capital, LLC was formed by Steven C. Wyer and Kurt V. Beasley to buy, collect, and resell charged-off consumer debt.
- Merchant organized twenty-eight Colorado registered limited liability partnerships (RLLPs) and sold general partnership interests to hundreds of investors, raising more than $20 million.
- Merchant served as managing general partner for each RLLP; investors could remove Merchant only “for cause” and only by unanimous vote, making removal effectively impracticable.
- Although offering documents and agreements provided investors nominal governance rights (e.g., voting and committee participation), investors’ actual involvement was generally minimal and information-poor.
- The SEC alleged the RLLPs’ funds were pooled and that the partnerships could not operate economically without pooling across entities and relying on centralized operations.
- The SEC further alleged offering materials misrepresented the RLLPs’ independence and failed to disclose that Merchant delegated significant partnership duties to New Vision Financial LLC.
- After a bench trial, the district court entered judgment for defendants, holding the interests were not securities and, alternatively, that the SEC failed to prove fraud.

## Issues

1. Whether the RLLP general partnership interests were “investment contracts” and therefore “securities” under federal securities laws.
2. Whether the district court used the correct legal standard and evidentiary evaluation in rejecting the SEC’s antifraud claims once the interests are properly treated as securities.

## Decision

- Reversed the district court’s holding that the RLLP interests were not securities.
- Held the interests were “investment contracts” based on the transaction’s economic realities.
- Vacated the district court’s antifraud determinations to the extent they were tied to the erroneous “no security” conclusion.
- Remanded for further proceedings applying the correct securities-law framework to liability and remedies.

## Legal Principles

- Investment-contract analysis applies a substance-over-form inquiry focused on economic reality, not organizational labels or formal governance provisions.
- Under Howey, an investment contract exists where there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits derived from the efforts of others.
- Horizontal commonality may be shown by pooling investor funds and sharing profits and losses pro rata.
- General partnership status and nominal voting rights do not defeat investment-contract status when investors, as a practical matter, cannot exercise meaningful control and are dependent on the promoter’s managerial and entrepreneurial efforts.
- Where a trial court’s antifraud analysis is intertwined with an incorrect threshold determination that an instrument is not a security, the appropriate course is vacatur and remand for reconsideration under the proper legal standard.

## Conclusion

The Eleventh Circuit concluded that the RLLP partnership interests functioned as passive investments dependent on the managers’ efforts, making them securities as investment contracts, and sent the case back for renewed consideration of the SEC’s antifraud allegations and related relief under that corrected classification.


SEC v. Merchant Capital, LLC, 483 F.3d 747 (11th Cir. 2007)