Joint Venture Interests as Securities

Abstract

Colorado federal and state courts have considered whether joint venture interests offered to participants for oil and gas development are securities subject to regulation under federal and state securities laws seven times since 2011. In the most recent State trial court decision on remand from the Colorado Court of Appeals, the joint venture interests were found to be securities, and the defendants were found to be offering and selling the securities. This decision is now consistent with the Tenth Circuit Court of Appeals, and likely spells the end of the oil and gas joint venture programs structured to avoid securities regulation while still cold-calling a large number of prospective investors, providing nominal management rights, and not requiring industry expertise. In Colorado, the Court of Appeals decision firmly established the economic realities test as the test to determine whether a transaction involved a security, and eliminated the strong presumption established in Williamson v. Tucker that a general partnership interest was not a security. consistently with the Tenth Circuit, provided a path for those wishing to form or defend joint ventures to follow. While, as noted by the Court of Appeals, “[courts] look at the expectations...at the time the interest is sold”, meaningful post-sale participation can be an indication of what the parties (and especially the investors) expected at the time of sale.