## Facts

- Organizers planned to operate a for-profit country club on a 22-acre property in Marin County, California, under a contract requiring a $400 down payment and substantial future payments; only the down payment had been paid at the time of proceedings.
- After taking possession, the organizers made and planned significant improvements (e.g., grass, pool, remodeling; contemplated additional pools and a golf course).
- To fund acquisition and development, the organizers sold club memberships to the public, including “charter memberships” and other membership tiers with increasing prices tied to added facilities; members also owed monthly dues fixed at purchase.
- Membership documents stated members had “no rights in the income or assets” of the club; the membership primarily conferred rights to use facilities, with golf access requiring a separate membership.
- Memberships were not freely alienable: transfers required board approval; members could be expelled only for misbehavior or nonpayment.
- The Commissioner of Corporations concluded the memberships were “securities” and issued a desist-and-refrain order for sales without a permit; after a hearing the Commissioner refused to vacate the order.
- The superior court granted a writ of mandate ordering the Commissioner to vacate the order, finding the memberships were not securities; the Commissioner appealed.

## Issues

1. Whether for-profit country club memberships sold to raise funds for acquisition and development, though disclaiming profit or ownership rights and primarily conferring facility-use rights, are “securities” under the California Corporate Securities Act requiring a permit.

## Decision

- The California Supreme Court reversed the judgment granting mandate.
- The court held the memberships were “securities” within the meaning of the Corporate Securities Act, so a permit was required.
- The court directed denial of the petition for writ of mandate, leaving the Commissioner’s desist-and-refrain order in effect.

## Legal Principles

- The Corporate Securities Act is remedial and is construed broadly to protect the public from speculative or fraudulent capital-raising schemes.
- Substance controls over form: disclaimers that purchasers have no rights to income or assets do not prevent an instrument from being a security when it functions to raise capital and places purchasers’ funds at risk.
- An arrangement may be a security when it raises “risk capital” for a venture through public solicitation, with purchasers in a largely passive role and dependent on the promoter’s success to receive the expected benefits.
- Not every prepaid service or club arrangement is a security; where an enterprise is thinly capitalized or relies on member payments to finance startup acquisition and development, the transaction may fall within securities regulation.

## Conclusion

The court treated the membership program as a regulated capital-raising device because purchasers supplied risk capital to a profit-seeking venture under promoter control, making the memberships “securities” subject to the permit requirement.


Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811 (Cal. 1961)