## Facts

- Promoters organized a group of related entities to manufacture and distribute “Steri Products,” an ultrasonic dental device improvement using sterile water.
- Aqua-Sonic sold geographically defined licenses to distribute Steri Products.
- Ultrasonic offered licensees an “optional” sales-agency arrangement under which Ultrasonic would perform the primary marketing and servicing functions.
- Promotional materials emphasized tax benefits and projected profits, targeting purchasers seeking tax advantages and passive returns rather than experienced dental-supply distributors.
- Although licensees retained nominal contractual powers (e.g., cancel the agency, some pricing control, record inspection), all 50 license purchasers during the offering period also entered Ultrasonic’s agency agreements.
- The SEC alleged the licenses, considered with the agency arrangements and overall marketing program, were investment contracts sold without registration and with material misstatements and omissions.

## Issues

1. Whether the distributorship licenses, viewed in the full economic context of the program and related agency arrangements, were “investment contracts” and thus “securities” under the federal securities laws.
2. Whether the “efforts of others” prong of the Howey test is satisfied when investors retain formal rights but, in practice, expected profits depend predominantly on promoters’ and agents’ managerial efforts.

## Decision

- The Second Circuit affirmed the district court’s judgment and injunction against Hecht and Inventel.
- The court held the licenses were investment contracts because the program, in economic reality, involved an investment in a common enterprise with an expectation of profits derived predominantly from others’ essential managerial efforts.
- Because appellants conceded that statutory violations followed if the licenses were securities, the court left standing the findings of unregistered offering/sales and antifraud violations and upheld the injunctive relief.

## Legal Principles

- “Investment contract” status turns on economic reality rather than formal labels or nominal contractual rights.
- Under Howey, the “solely from the efforts of others” element is applied flexibly; it is satisfied where non-investors perform the essential managerial efforts that determine success or failure.
- An arrangement may be a security even if investors possess theoretical control rights, when the scheme is structured and marketed so that investors are expected to rely on promoters or third parties for meaningful profit generation.
- Related agreements may be evaluated as an integrated offering when they function together in practice (e.g., an “optional” service arrangement that is uniformly adopted and promoted as necessary to achieve expected returns).

## Conclusion

The court treated the distributorship licenses and associated sales-agency arrangements as a single economic program and held they were investment contracts because purchasers were induced to rely on the promoters’ and agent’s essential marketing and managerial efforts; the resulting injunction for registration and antifraud violations was affirmed.


Securities & Exchange Commission v. Aqua-Sonic Prods. Corp., 687 F.2d 577 (2d Cir. 1982)