497 F.2d 473
Fed. Sec. L. Rep. P 94,710
SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant,
KOSCOT INTERPLANETARY, INC., et al., Defendants-Appellees.
United States Court of Appeals, Fifth Circuit.
July 15, 1974.
Before RIVES, GEWIN and RONEY, Circuit Judges.
GEWIN, Circuit Judge:
This appeal emanates from a district court order denying an injunction
sought by the Securities & Exchange Commission (SEC) against
Koscot Interplanetary, Inc., (Koscot) for allegedly violating
the federal securities laws. Specifically, the SEC maintained
that the pyramid promotion enterprise operated by Koscot
was within the ambit of the term security, as employed by the
Securities Act of 1933 and the Securities Exchange Act of 1934,
[FN1] that as such it had to be registered with the SEC pursuant
to the '33 Act, [FN2] and that the manner in which Koscot purveyed
its enterprise to potential investors contravened the anti-fraud
provisions of the *475 '34 Act. [FN3] In a comprehensive
opinion, reported at 365 F.Supp. 588 (N.D.Ga. 1973), the district
court denied the injunction holding that the Koscot Scheme did
not involve the sale of a security. Because of our disagreement
with the district court's reasoning, we reverse.
FN1. Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1) (1970) provides as follows:
'(1) the term 'security' means any note, stock, treasury stock,
bond, debenture, evidence of indebtedness, certificate of interest
or participation in any profit-sharing agreement, collateral-trust
certificate, preorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, certificate
of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, or, in general, any interest or
instrument commonly known as a 'security', or any certificate
of interest or participation in, temporary or interim certificate
for, receipt for, guarantee of, or warrant or right to subscribe
to or purchase, any of the foregoing.'
FN2. Section 5, 15 U.S.C. § 77e (1970).
FN3. The definition of security enunciated in § 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10) (1970) is substantially identical to that contained in the Securities Act. See Tcherepnin v. Knight, 389 U.S. 332, 335-336, 88 S.Ct. 548, 552-553, 19 L.Ed.2d 564, 569 (1967). It is claimed that Koscot violated § 10(b), 15 U.S.C. § 78j(b) (1970) and Rule 10b-5, 17 C.F.R. 240.106-5 (1973).
In addition to the aforementioned relief, the SEC sought the appointment
of an equity receiver and an order directing an accounting of
A. The Koscot Scheme
The procedure followed by Koscot in the promotion of its enterprise
can be synoptically chronicled. [FN4] A subsidiary of Glen W.
Turner Enterprises, Koscot thrives by enticing prospective investors
to participate in its enterprise, holding out as a lure the expectation
of galactic profits. All too often, the beguiled investors are
disappointed by paltry returns.
FN4. The district court left little doubt that the scheme is fraudulent. It noted the following:
'In reviewing the record in this case, it is plain that defendants' program is a getrich-quick scheme in the worst sense. Poor, unwary persons have been induced by high-pressure sales tactics to part with their money, and very few have harvested the large returns they were led to believe were common for those participating in the program.'
365 F.Supp. at 590 (N.D.Ga.1973). Koscot does not seriously contest this characterization. Moreover, the record compels the conclusion that Koscot practices were fraudulent.
The district court initially stayed the entry of its judgment
because it had been notified by the Judicial Panel on Multi-District
Litigation that transfer of this case along with a plethora of
others was being considered. Upon being apprised by the Panel
on Multi-District Litigation that the motion to transfer had been
tentatively denied, the district court lifted the stay. (R. 1038).
See In Re Glen W. Turner Enterprises Litigation, 355 F.Supp. 1402
(Jud.Pan.Mult.Lit.1973). According to the Judicial Panel on Multi-District
Litigation, Glen W. Turner Enterprises, Inc., and its two subsidiaries,
Koscot and Dare to be Great, are the subject of seventeen actions
in ten federal districts. See 355 F.Supp. at 1405.
The vehicle for the lure is a multi-level network of independent
distributors, purportedly engaged in the business of selling a
line of cosmetics. At the lowest level is a 'beauty advisor'
whose income is derived solely from retail sales of Koscot products
made available at a discount, customarily of 45%. Those desirous
of ascending the ladder of the Koscot enterprise may also participate
on a second level, that of supervisor or retail manager. For
an investment of $1,000, a supervisor receives cosmetics at a
greater discount from retail price, typically 55%, to be sold
either directly to the public or to be held for wholesale distribution
to the beauty advisors. In addition, a supervisor who introduces
a prospect to the Koscot program with whom a sale is ultimately
consummated receives $600 of the $1,000 paid to Koscot. The loftiest
position in the multilevel scheme is that of distributor. An investment
of $5,000 with Koscot entitles a distributor to purchase cosmetics
at an even greater discount, typically 65%, for distribution to
supervisors and retailers. Moreover, fruitful sponsorship of
either a supervisor or distributor brings $600 or $3,000 respectively
to the sponsor.
The SEC does not contend that the distribution of cosmetics is
amenable to regulation under the federal securities laws. Rather,
it maintains that the marketing of cosmetics and the recruitment
aspects of Koscot's enterprise are separable and that only the
latter are within the definition of a security. That the district
court acknowledged the *476 fragmentation discerned by
the SEC is witnessed by the following observation:
'Many if not all of the persons, seeking to become Koscot distributors
are attracted by the lure of money to be earned by high-pressure
recruiting of other persons into the Koscot program, rather than
the sale of the cosmetics themselves.'
365 F.Supp. at 590. And since case-law countenances the fragmented
approach which the SEC presses upon us, see SEC v. United Benefit
Life Insur. Co., 387 U.S. 202, 207, 87 S.Ct. 1557, 1559, 18 L.Ed.2d
673, 677 (1967); SEC v. Glen W. Turner Enterprises, Inc., 474
F.2d 476 (9th Cir.), cert. denied 414 U.S. 821, 94 S.Ct. 117,
38 L.Ed.2d 53 (1973), it is upon the promotional aspects that
we focus in determining whether Koscot did offer a security.
The modus operandi of Koscot and its investors is as follows.
Investors solicit prospects to attend Opportunity Meetings at
which the latter are introduced to the Koscot scheme. Significantly,
the investor is admonished not to mention the details of the business
before bringing the prospect to the meeting, a technique euphemistically
denominated the 'curiosity approach.' The Koscot manual describes
the reasoning behind the approach and its operation in the following
'DON'T GO INTO DETAILS. Never explain the program to a prospect
before bringing him to an Opportunity Meeting. Do not mention
Kosmetics or give any particulars, as many people will prejudge
the program and decide it is not for them before they see the
presentation. USE THE CURIOSITY APPROACH. When you invite a
prospect to an Opportunity Meeting, arouse his curiosity. Tell
him you have discovered a wonderful financial opportunity that
will fit him like a glove. Or, tell him you have seen a money
tree and would like for him to take a look at it.'
Thus, in the initial stage, an investor's sole task is to attract
individuals to the meeting.
Once a prospect's attendance at a meeting is secured, Koscot
employees, frequently in conjunction with investors, undertake
to apprise prospects of the 'virtues' of enlisting in the Koscot
plan. The meeting is conducted in conformity with scripts prepared
by Koscot. Indeed, Koscot distributes a bulletin which states:
'. . . this program is to be presented by the script. It is strongly
recommended that you consider replacing any individual who does
not present the program verbatim.' The principal design of the
meetings is to foster an illusion of affluence. Investors and
Koscot employees are instructed to drive to meetings in expensive
cars, preferably Cadillacs, to dress expensively, and to flaunt
large amounts of money. It is intended that prospects will be
galvanized into signing a contract by these ostentations displayed
in the evangelical atmosphere of the meetings. Go-Tours, characterized
by similar histrionics, are designed to achieve the same goal.
The final stage in the promotional scheme is the consummation
of the sale. If a prospect capitulates at either an Opportunity
Meeting or a Go-Tour, an investor will not be required to expend
any additional effort. Less fortuitous investors whose prospects
are not as quickly enticed to invest do have to devote additional
effort to consummate a sale, the amount of which is contingent
upon the degree of reluctance of the prospect.
B. The District Court
The district court rebuffed the SEC's effort to subject Koscot's
promotional scheme to the federal securities laws. The SEC argued
that the scheme qualified as a profit-sharing arrangement, an
interest commonly known as a security, and an investment contract.
The profit-sharing theory was rejected because in the district
court's view, a successful recruiting distributor receives not
a *477 share of Koscot's profit but rather a fixed fee.
365 F.Supp. 590-591. [FN5] The court refused to endorse the
SEC's position that the pyramid arrangement constituted an interest
'commonly known as a security' for two reasons. First, even under
a traditional approach, under which the essential inquiry is how
the interest is viewed in legal and financial circles, the question
of whether a pyramid arrangement fell within the definition was
still a polemical one; [FN6] and second, the risk capital theory,
which allegedly would encompass the Koscot arrangement, was of
such recent vintage and had such a mixed reception with the courts
that it should not be applied in lieu of the traditional definition.
FN5. The district court in SEC v. Turner Enterprises, 348 F.Supp.
766, 776 (D.Or.1972), aff'd, 474 F.2d 476 (9th Cir. 1973), drew
the contrary conclusion, reasoning that in the Dare to be Great
Enterprises, 'what the investors receive, afterall, is a right
to a cut of the profits from other investors.' The Oregon district
court dismissed as insignificant the fact that the entire profits
are not distributed to all investors.
FN6. The parameters of the phrase 'commonly known as a security',
like those of the phrase 'interest in a profit sharing arrangement'
are largely unrefined in federal law. They have, however, been
defined by state courts. For an extended analysis of such developments,
see Comment, Pyramid Marketing Plans and Consumer Protection:
State & Federal Regulation, 21 J. of Public Law 445 (1972).
FN7. The thrust of the inquiry under the risk capital test is whether the investor has subjected his money to the risk of an enterprise over which he exercises no managerial control. See SEC v. Glen W. Turner Enterprises, Inc., 348 F.Supp. 766, 773-774 (D.Or.1972), aff'd, 474 F.2d 476 (9th Cir.), cert. denied, 414 U.S. 82, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). The Oregon district court, unlike the district court below, concluded that this approach had sufficient judicial support to warrant its application in determining whether an interest is commonly known as a security.
We would note that there is some overlap between the risk capital
approach, as employed by the district court in Turner in determining
whether an interest is commonly known as a security, and the managerial
control test utilized by the Court of Appeals in Turner in defining
whether an investment contract exists. The overlap can be ascribed
to the fact that the element of managerial control is implicit
in the risk capital test as derived from Silver Hills Country
Club v. Sobieski, 55 Cal.2d 811, 13 Cal.Rptr. 186, 361 P.2d 906
(1961). See Note, Pyramid Schemes: Dare Be Regulated,
61 Geo.L.J. 1257, 1279 (1973). The risk capital approach is discussed
in further detail in Comment, Pyramid Marketing Plans and Consumer
Protection: State and Federal Regulation, 21 J. of Public Law
445, 457-464 (1973) and Note, Pyramid Schemes: Dare Be
 Of more immediate concern is the reasoning employed by the
district court in rejecting the SEC's contention that Koscot sold
'investment contracts,' for it is our disagreement with this conclusion
that prompts us to reverse. The district court correctly cited
the following language from SEC v. W. J. Howey Co., 328 U.S. 293,
298-299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244, 1249 (1946), as the
standard controlling its disposition of the case.
'An investment contract for purposes of the Securities Act means
a contract, transaction or scheme whereby a person invests his
money in a common enterprise and is led to expect profits solely
from the efforts of the promoter or a third party . . ..' (emphasis
This test subsumes within it three elements: first, that there
is an investment of money; second, that the scheme in which an
investment is made functions as a common enterprise; and third,
that under the scheme, profits are derived solely from the efforts
of individuals other than the investors. See, e.g., SEC v. Glen
W. Turner Enterprises, 474 F.2d 476 (9th Cir.), cert. denied,
414 U.S. 821, 94 S.Ct. 117, 38 L.Ed,2d 53 (1973); 1050 Tenants
v. Jakobson, 365 F.Supp. 1171, 1176 (S.D.N.Y.1973). The district
court pretermitted a consideration of the first two elements in
finding that the third component of the test was not satisfied
because Koscot investors expended effort in soliciting recruits
*478 to meetings, in participating in the conduct of meetings,
and in attempting to consummate the sale of distributorships and
subdistributorships. Moreover, it specifically rejected the less
idolatrous adherence to the Howey language manifest in SEC v.
Glen W. Turner Enterprises, Inc., supra, reasoning that the Ninth
Circuit's interpretation was antagonistic to the literal approach
of both this Circuit and the Supreme Court.
Thus, we are called upon to address that which the court below
did not consider-- whether the Koscot scheme satisfies the first
two elements of the Howey test-- and that which the district court
did consider-- whether the scheme satisfies the third component
of the test. The latter inquiry entails, in the first instance,
a determination of whether the 'solely from the efforts of others'
standard is to be literally or functionally applied. We address
these issues seriatim.
A. The First Two Elements
 Since it cannot be disputed that purchasers of supervisorships
and distributorships made an investment of money, cf. SEC v. Glen
W. Turner Enterprises, Inc., supra, at 481, our initial concern
is whether the Koscot scheme functions as a common enterprise.
As defined by the Ninth Circuit,'a common enterprise is one in
which the fortunes of the investor are interwoven with and dependent
upon the efforts and success of those seeking the investment or
of third parties.' SEC v. Glen W. Turner Enterprises, Inc., supra
at 482 n. 7. The critical factor is not the similitude or coincidence
of investor input, but rather the uniformity of impact of the
That this definition comports with the standard applied by the
Supreme Court and this Circuit is witnessed by an examination
of the reasoning employed in Howey, supra, and in Blackwell v.
Bentsen, 203 F.2d 690 (5th Cir. 1953), cert. dismissed, 347 U.S.
925, 74 S.Ct. 528, 98 L.Ed. 1078 (1954). In Howey, the Court
of Appeals had concluded that an investment contract did not exist
where the management and cultivation of citrus acreage was entrusted
to the promoter, with the rate of the investor's return to be
measured by the produce of the acreage he owned. The Court of
Appeals explained that:
'Here it is quite clear that each purchaser looked for the income
from his investment to the fruitage of his own grove and not to
the fruitage of the groves as a whole. It is quite clear, too,
that each purchaser's income was in no sense dependent upon the
purchase or development of other tracts than his own except in
the sense that as grove owners generally prospered, each owner
of a grove would.' (emphasis added)
151 F.2d 714, 717 (5th Cir. 1945). In reversing, the Supreme
Court emphasized not whether profits were pooled, but rather the
fact that the feasibility and success of the enterprise, in attracting
individuals to invest, and in cultivating, harvesting and marketing
the citrus products, rested on the availability of the Howey Company's
'Such persons (investors) have no desire to occupy the land or
to develop it themselves; they are attracted solely by the prospects
of a return on their investment. Indeed, individual development
of the plots of land that are offered and sold would seldom be
economically feasible due to their small size. Such tracts gain
utility as citrus groves only when cultivated and developed as
component parts of a larger area. A common enterprise managed
by respondents or third parties with adequate personnel and equipment
is therefore essential if the investors are to achieve their paramount
aim of a return on their investments.' (emphasis added)
328 U.S. at 300, 66 S.Ct. at 1103, 90 L.Ed. at 1250. Moreover,
in Blackwell v. Bentsen, supra, involving investments in a tract
which was part of an 800 acre *479 unit to be developed
and marketed as a grove, this Court implicitly rejected any requirement
of coterminality of investor input. For there, investors were
permitted to sell the produce of their own acreage if they elected
to do so.
 Similarly, here, the fact that an investor's return is independent
of that of other investors in the scheme is not decisive. Rather,
the requisite commonality is evidenced by the fact that the fortunes
of all investors are inextricably tied to the efficacy of the
Koscot meetings and guidelines on recruiting prospects and consummating
a sale. See SEC v. Glen W. Turner Enterprises, Inc., supra at
482; United States v. Herr, 338 F.2d 607 (7th Cir. 1964), cert.
denied, 382 U.S. 999, 86 S.Ct. 563, 15 L.Ed.2d 487, rehearing
denied, 383 U.S. 922, 86 S.Ct. 898, 15 L.Ed.2d 679 (1966); cf.
Marshall v. Lamson Bros. and Co., 368 F.Supp. 486, 488 (S.D.Iowa
1974); Mitzner v. Cardet International, Inc. et al., 358 F.Supp.
1262, 1265 (N.D.Ill.1973). [FN8]
FN8. A more stringent interpretation of the commonality requirement
is reflected in Milnarik v. M-S Commodities Inc., 457 F.2d 274
(7th Cir.), cert. denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d
144 (1972). Investors there deposited money with one Nelson, with
the understanding that he could employ the funds at his discretion
to trade in commodity futures. Although all investors relied
on Nelson's discretion, the court found the requisite commonality
absent because there was no evidence that Nelson traded in a uniform
manner or that investors shared ratably in profits derived from
his purchases of futures. See also Wasnowic v. Chicago Bd. of
Trade et al., 352 F.Supp. 1066 (M.D.Pa.1972), aff'd without opinion,
491 F.2d 752 (3d Cir. 1973), cert. denied, U.S. , 94 S.Ct. 2407,
40 L.Ed.2d 773, No. 73-1409, 42 U.S.L.W. 3628 (May 14, 1974);
Stuckey v. duPont Glore Forgan Inc., 59 F.R.D. 129, 131 (N.D.Cal.1973).
Contra, Marshall v. Lamson Bros. & Co., supra; Berman v.
Orimer Trading, Inc., 291 F.Supp. 701 ,702 (S.D.N.Y.1968).
B. The Third Element-- Solely from the Efforts of Others
 As was noted earlier, the critical issue in this case is
whether a literal or functional approach to the 'solely from the
efforts of others' test should be adopted, i.e., whether the exertion
of some effort by an investor is inimical to the holding that
a promotional scheme falls within the definition of an investment
contract. We measure the viability of the SEC's advocacy of a
functional approach by its compatibility with the remedial purposes
of the federal securities acts, the language employed and the
derivation of the test utilized in Howey, and the decisions in
this circuit and other federal courts.
1. The Legal Standard
 We begin our analysis by noting that the 1933 and 1934 Acts
are remedial in nature, [FN9] Affiliated Ute Citizens v. United
States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741,
760 (1972); SEC v. W.J. Howey Co., supra, 328 U.S. at 299, 66
S.Ct. at 1103, 90 L.Ed. at 1250; Tcherepnin v. Knight, 389 U.S.
332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564, 569 (1967), and hence
are to be broadly construed. Tcherepnin v. Knight, supra at 336,
88 S.Ct. at 553, 19 L.Ed.2d at 569; Ayers v. Wolfinbarger, 491
F.2d 8, 16 (5th Cir. 1974); SEC v. Glen W. Turner Enterprises,
Inc., 474 F.2d at 480- 481; Nor-Tex Agencies, Inc. v. Jones, 482
F.2d 1093, 1098 (5th Cir. 1973), cert. denied, 415 U.S. 977,
94 S.Ct. 1563, 39 L.Ed.2d 873 (1974); SEC v. MacElvain, 417 F.2d
1134, 1137 (5th Cir. 1969). This court recently reaffirmed these
principles, noting in Smallwood *480 v. Pearl Brewing Co.,
489 F.2d 579, 592 (5th Cir. 1974), that 'the securities laws are
intended to protect investors not merely to test the ingenuity
of sophisticated corporate counsel.'
FN9. The remedial purposes of the Securities Act of 1933, were expressed as follows:
'The aim is to prevent further exploitation of the public by the sale of unsound, fraudulent, and worthless securities through misrepresentation; to place adequate and true information before the investor; to protect honest enterprise, seeking capital by honest presentation against the competition afforded by dishonest securities offered to the public through crooked promotion, . . .'
See Senate Committee on Banking & Currency, S.Rep.No.47, 73d
Cong., 1st Sess. 1 (1933).
A literal application of the Howey test would frustrate the remedial
purposes of the Act. As the Ninth Circuit noted in SEC v. Turner
Enterprises, Inc., supra at 482, 'it would be easy to evade (the
Howey test) by adding a requirement that the buyer contribute
a modicum of effort.' See also Lino v. City Investing Co., 487
F.2d 689, 692-693 (3d Cir. 1973). The Supreme Court admonished
against such a rigid and quixotic application, noting in Tcherepnin
v. Knight, supra, 389 U.S. at 336, 88 S.Ct. at 553, 19 L.Ed.2d
at 569, that in searching for the meaning and scope of the word
security, from should be disregarded for substance, and proclaiming
in SEC v. W.J. Howey Co., 328 U.S. at 301, 66 S.Ct. at 1104, 90
L.Ed. at 1251, that 'the statutory policy of affording broad protection
to investors is not to be thwarted by unrealistic and irrelevant
formulae.' It would be anomalous to maintain that the Court in
Howey intended to formulate the type of intractable rule which
it had decried. The admitted salutary purposes of the Acts can
only be safeguarded by a functional approach to the Howey test.
Moreover, a close reading of the language employed in Howey and the authority upon which the Court relied suggests that, contrary to the view of the district court, we need not feel compelled to follow the 'solely from the efforts of others' test literally. Nowhere in the opinion does the Supreme Court characterize the nature of the 'efforts' that would render a promotional scheme beyond the pale of the definition of an investment contract. Clearly the facts presented no issue of how to assess a scheme in which an investor performed mere perfunctory tasks. Indeed, just prior to concluding that the sales of units of citrus grove development, coupled with contracts for cultivating, marketing and remitting the net proceeds to investors constituted sales of investment contracts, the Court observed that 'the Promoters manage, control and operate the enterprise.' 328 U.S. at 300, 66 S.Ct. at 1104, 90 L.Ed. at 1250 (emphasis added). One commentator has seized upon the italicized words in concluding that only schemes in which investors exercise managerial control are excluded from the definition of investment contracts. See Long, An Attempt to Return 'Investment Contracts' to the Mainstream of Securities Regulation, 24 Okla.L.Rev. 135, 176 (1971).
The derivation of the 'solely from the efforts of others' test
also tends to belie a talismanic approach to its application.
The Court reasoned in Howey that Congress intended that this
test be applied because it had been crystallized by prior state
court interpretations. 328 U.S. at 298 n. 4, 66 S.Ct. at 1103
n. 4, 90 L.Ed. at 1249 n. 4. In the only state case cited in
the body of the opinion, State v. Gopher Tire & Rubber Co.,
146 Minn. 52, 177 N.W. 937 (1920), the agreement signed by investors
in the scheme contemplated that such investors would act as 'booster
agents' for the sale of Gopher Tire & Rubber Company's goods.
146 Minn. at 56, 177 N.W. at 938. And in one of the cases cited
in footnote 4 of Howey, supra, 328 U.S. at 298 n. 4, 66 S.Ct.
at 1103, 90 L.Ed. at 1249, Stevens v. Liberty Packing Corp., 111
N.J.Eq. 61, 161 A. 193 (1932), the scheme envisioned even more
substantial participation by an investor. Under the second of
two plans devised for raising rabbits, an investor would raise
rabbits sold to him by the company which would in turn then purchase
the offspring for a fixed price per head. Despite the efforts
that an investor with Liberty Packing Corp. might expend, the
New Jersey court deemed the rabbit breeding scheme to involve
an investment contract. [FN10] Thus, it is apparent that *481
neither Congress, in fashioning a definition of an investment
contract nor the Court in interpolating this definition, could
have relied upon crystallized authority endorsing a litmus formula.
[FN11] This observation militates against the conclusion that
the test was intended to exclude from the definition of investment
contract, any scheme where an investor contributed a nominal menial
FN10. The district court discounted State v. Gopher Tire &
Rubber Co. as a case materially different from the one presented
before it, noting that in the Gopher Tire program, an investor's
return was not directly linked to his own effort. See 365 F.Supp.
at 591 n. 1. We discern no material distinction in this respect
between the Koscot program and that offered in Stevens v. Liberty
Packing Corp., supra, a fact which attenuates the import of the
district court's observations concerning the Gopher Tire case.
FN11. The Supreme Court also cited four circuit court cases as
support for the 'solely from the efforts of others' test. See
SEC v. W.J. Howey Co., 328 U.S. at 299, n. 5, 66 S.Ct. at 1104,
90 L.Ed. at 1250, n. 5. An examination of these cases suggests
that the word 'solely' or alternatively entirely, was not irrevocably
entrenched in federal law. In SEC v. Crude Oil Corp. of America,
93 F.2d 844 (7th Cir. 1937), the court did not mention the word
entirely. In SEC v. Universal Service Ass'n, 106 F.2d 232, 237
(7th Cir. 1939), the Seventh Circuit defined an investment contract
as 'the investment of money with the expectation of profit through
the efforts of (others).' In Atherton v. United States, 128 F.2d
463 (9th Cir. 1942), while noting that purchasers looked entirely
to the efforts of promoters to make their investment a propitious
one, the court announced the legal principle to which it was adhering
as follows: 'in cases where the investor looks to the promoter
to determine the success of the investment, it has uniformly been
held by the federal courts that unit transactions of this general
character involve the sale of a security . . ..' Id. at 465.
The Ninth Circuit subsequently ascribed the derivation of an
'entirely' test to Atherton and SEC v. Joiner Leasing Corp., 320
U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943), in Penfield Co. of
Cal. v. SEC, 143 F.2d 746 (9th Cir. 1944). We find nothing in
the Joiner opinion, however, that compels an endorsement of an
'entirely' or 'solely' standard.
Subsequent case-law also supports the conclusion that the Howey
test is not possessed of the talismanic quality ascribed to it
by the court below. In SEC v. United Benefit Life Insurance Co.,
387 U.S. 202, 87 S.Ct. 1557, 18 L.Ed.2d 673 (1967), the Supreme
Court held that the accumulation provisions of an annuity contract
constituted an investment contract. Significantly, Justice Harlan
failed to cite Howey, but rather announced the test as being "what
character the instrument is given in commerce by the terms of
the offer, the plan of distribution, and the economic inducements
held out to the prospect." 387 U.S. at 211, 87 S.Ct. at 1562,
18 L.Ed.2d at 680, quoting SEC v. C. M. Joiner Leasing Corp.,
320 U.S. 344, 352, 353, 64 S.Ct. 120, 124, 125, 88 L.Ed. 88, 93,
94. Were the Howey definition to occupy the exalted position
in investment contract adjudication attributed to it by Koscot,
Justice Harlan inexorably would have relied upon it. We would
note too that the Court of Appeals in both this Circuit and the
Tenth and Second Circuits have on occasion deemed schemes to be
investment contracts in reliance upon the aforementioned language
from Joiner and not that from Howey. Compare Buie v. United States,
420 F.2d 1207, 1210 (5th Cir. 1969), cert. denied, 398 U.S. 932,
90 S.Ct. 1830, 26 L.Ed.2d 97 (1970) (sale of oil and gas leases
to be operated by sellers), with Continental Marketing Corp. v.
SEC, 387 F.2d 466 (10th Cir. 1967), cert. denied, 391 U.S. 905,
88 S.Ct. 1655, 20 L.Ed.2d 419 (1968) (sale of live beavers with
purchasers exhorted to contract with a professional rancher to
raise them), and Glen-Arden Commodities, Inc. v. Costantino, 493
F.2d 1027, 1034 (2d Cir. 1974) (sale of Scotch whiskey warehouse
Moreover, a significant number of federal courts invoking the
Howey test, have either given it a broader more salutary application
or endorsed such an application in principle. Thus, in several
cases where the scheme required or envisioned the possibility
of participation by an investor in the enterprise, courts nevertheless
found an investment contract *482 to exist. See Miller
v. Central Chinchilla Group, Inc., 494 F.2d 414 (8th Cir. 1974)
(investors purchased and raised Chinchillas which were then repurchased
by promoters and sold by latter to new prospects); SEC v. Glen
W. Turner, supra (promotion of self improvement courses by investors
to new prospects); United States v. Herr, supra (investors in
records and success manuals sold by American Sales Training Research
Associates, Inc. (ASTRA), in addition to receiving higher returns
for self distribution as opposed to distribution by ASTRA sales
force, received additional money from bringing in other inactive
distributors); Blackwell v. Bentsen, supra (deeds for citrus acreage
and management contracts, with provision that purchasers are permitted
to give directions as to the marketing of crops on their tract);
1050 Tenants v. Jakobson, 365 F.Supp. 1171 (S.D.N.Y.1973) (offering
of shares of stock, entitling purchasers to proprietary leases
in apartment at 1050 Park Avenue, which after closing date, was
to be managed by tenants); Mitzner v. Cardet International, Inc.
et al., 358 F.Supp. 1262 (N.D.Ill.1973) (scheme wherein area managers
recruited area distributors who in turn found people to deliver
Cardet brochures and pick up orders and deliver Cardet products
to purchasers); SEC v. Addison, 194 F.Supp. 709 (N.D.Tex.1961)
(in lieu of investing capital in potential profits of a mining
company, workers were entitled to invest by participating in mining
and other operations on a non-salaried basis). [FN12] Two Circuits,
while finding conventional franchise agreements beyond the reach
of the securities laws, have explicitly endorsed the broader definition
of investment contract. Compare Lino v. City Investing Co., 487
F.2d 689, 692 (3d Cir. 1973) with Nash & Associated, Inc.
v. Lum's of Ohio, 484 F.2d 392, 395 (6th Cir. 1973). See also
L.M.H. Inc. v. Lewis, 371 F.Supp. 395, 397 (D.N.J.1974). [FN13]
The prevailing scholarly *483 commentary comports with
this view. E.g., Long, An Attempt to Return 'Investment Contracts'
to the Mainstream of Securities Regulation, 24 Okla.L.rev. 135,
144 (1971); Coffey, The Economic Realities of a 'Security': Is
There a More Meaningful Formula?, 18 W.Res.L.Rev. 367, 377 (1967);
Comment, Pyramid Marketing Plans and Consumer Protection: State
and Federal Regulation, 21 J. of Public Law 445, 460 (1972); Note,
Securities Regulation of Pyramid Schemes, 51 Texas L.Rev.
788, 794 (1973); Note, Pyramid Schemes: Dare to be Regulated,
61 Geo.L.J. 1257, 1280 (1973).
FN12. The Tenth Circuit in Andrews v. Blue, 489 F.2d 367 (10th
Cir. 1973) may have sub silentio endorsed a more resilient approach
to the test. In this case, Andrews engaged in a joint venture
involving real estate with Blue and Austin, pursuant to which
Andrews contributed $36,899.22 and agreed to use his real estate
expertise as a consultant for the enterprise. In holding an investment
contract to exist, the court noted that Andrews' role as a consultant
was only a nominal one and that Andrews in fact possessed no managerial
status. Id. at 375. Significantly, however, the court had previously
observed that 'Andrews invested the agreed sum and devoted substantial
time to the development of the property (which was the subject
of the joint venture).' Id. at 371 (emphasis added).
FN13. In several other cases, the federal courts have given limited expression to a functional application of the Howey test by emphasizing that it is the managerial role performed by an investor that differentiates an enterprise from one involving a conventional investment contract. Such emphasis, implying, as it does, that the exertion of some effort by an investor is not antagonistic to a finding that an investment contract exists, belies a literal application of the Howey test. Thus, in Mr. Steak, Inc. v. River City Steak, 460 F.2d 666 (10th Cir. 1972), aff'g, 324 F.Supp. 640 (D.Colo.1970), involving a counterclaim to an action for breach of a franchise agreement, the Tenth Circuit quoted the district court's characterization of restaurant franchise as follows:
'. . . Defendant has not endeavored to show that it was prevented from directing the operations of the restaurant or that it lacked the requisite knowledge, skill or expertise to undertake that task. * * * We contrast the usual investor-promoter situation, where the skill of ingenuity of the investor does not determine the success or failure of the venture and where the investor's fortunes parallel those of the promoter, to the present situation, where River City Steak's enterprise stands or falls independently of Mr. Steak's success of failure.' (emphasis added).
460 F.2d at 670, quoting 324 F.Supp. at 645. In Wieboldt v. Metz,
355 F.Supp. 255, 260 (S.D.N.Y.1973), the district court acknowledged
that the risk capital approach which it deemed to have been applied
by the Ninth Circuit in Turner provides useful input in determining
whether a franchise is a security. Finally, in Beefy Trail, Inc.
v. Beefy King Intl., Inc., 348 F.Supp. 799, 805 (M.D.Fla.1972),
the court held a restaurant franchise not to fall within the ambit
of the term investment contract, reasoning that this was not a
situation where the investor's predominant concern was accrual
of financial gain attributable to the efforts of others unknown
to and outside the control of the investor.
 In view of these developments and our analysis of the import
of the language in and the derivation of the Howey test, we hold
that the proper standard in determining whether a scheme constitutes
an investment contract is that explicated by the Ninth Circuit
in SEC v. Glen W. Turner Enterprises, Inc., supra. In that case,
the court announced that the critical inquiry is 'whether the
efforts made by those other than the investor are the undeniably
significant ones, those essential managerial efforts which affect
the failure or success of the enterprise.' Id. at 482. [FN14]
FN14. This test derives support from the language employed in Lino v. City Investing Co., supra; Nash & Associates Inc. v. Lum's of Ohio, supra; 1050 Tenants v. Jakobson, supra; Mitzner v. Cardet International Inc., et al., supra; and the cases cited in note 13 supra, where the element of investor managerial control was emphasized as a critical index in determining whether or not an investment contract existed.
This test also comports with the position adopted by the SEC. Securities Act Release No. 5211 (Nov. 30, 1971), reported in 1971-72 Transfer Binder CCH Fed.Sec.L.Rep. #98446, provides as follows:
'It must be emphasized that the assignment of nominal or limited responsibilities to the participant does not negative the existence of an investment contract; where the duties assigned are so narrowly circumscribed as to involve little real choice of action or where the duties assigned would in any event have little direct effect upon receipt by the participant of the benefits promised by the promoters, a security may be found to exist. As the Supreme Court has held, emphasis must be placed upon economic reality. See Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). While the Commission has not taken the position that a franchise arrangement necessarily involves the offer and sale of a security, in the Commission's view a security is offered or sold where the franchisee is not required to make significant efforts in the operation of the franchise in order to obtain the promised return.'
Since a ruling fashioned by an agency charged with administering
a statute, though not dispositive, is entitled to great weight,
e.q., Zeller v. Bogue Electric Maufacturing Corp., 476 F.2d 795,
800 (2d Cir. 1973), we must pay heed to the SEC's position.
Contrary to the view of the district court, our adoption of this
test represents no fundamental departure from the standard we
have previously applied. Indeed, our canvass of the cases presenting
an investment contract issue to this court, see Nor-Tex Agencies,
Inc. v. Jones, supra; SEC v. MacElvain, supra; Buie v. United
States, supra; Lynn v. Caraway, 379 F.2d 943 (5th Cir. 1967),
cert. denied, 393 U.S. 951, 89 S.Ct. 373, 21 L.Ed.2d 362 (1968);
Moses v. Michael, 292 F.2d 614 (5th Cir. 1961); Roe v. United
States, 287 F.2d 435 (5th Cir.), cert. denied, 368 U.S. 824, 82
S.Ct. 43, 7 L.Ed.2d 29 (1961), second appeal, 316 F.2d 617 (5th
Cir. 1963); Blackwell v. Bentsen, supra; SEC v. W. J. Howey Co.,
151 F.2d 714 (5th Cir. 1945), rev'd, 328 U.S. 293, 66 S.Ct. 1100,
90 L.Ed. 1244 (1946), reveals that it has only been in two instances
that schemes have been deemed to fall without the definition.
In Howey of course, the Supreme Court disabused us of our misguided
reasoning. And in Lynn v. Caraway, supra, the sale of fractional
undivided interests in oil and gas leases with the seller relinquishing
all control to the purchaser could not have qualified as an investment
contract under any conceivable legitimate test. The disposition
in these two cases in no way militates against our adoption of
a resilient standard which will allow for a practical and dynamic
scrutiny of investment *484 schemes. Indeed, the decision
in Blackwell v. Bentsen, supra, may have presaged such an adoption,
for there this court held an investment contract was established
by a scheme involving deeds for citrus acreage and management
contracts, despite the proviso in the management contracts that
purchasers were permitted to direct the marketing of the produce
form their particular tracts. [FN15]
FN15. In addition to misconceiving this court's approach to prior
investment contract adjudications, the district court overstated
the prophylactic bent assumed by the Ninth Circuit which decided
Turner. We note that in Chapman v. Rudd Paint and Varnish Company,
409 F.2d 635 (9th Cir. 1969), the Ninth Circuit ritualistically
applied the 'solely from the efforts of (others)' test to a distributorship
of a product known as 'Run-Guard,' a substance designed to prevent
runs in nylon hosiery. Thus, after observing that the brochure
utilized by Rudd Paint and Varnish Company to attract distributors
minimized the amount of effort required by a distributor and maximized
that required of the franchisor, the court maintained that '.
. . the very fact that the brochure emphasizes the amount of assistance
the company will provide implies that the distributor is also
to contribute an effort.' Id. at 641 (emphasis added). This
reasoning can hardly be deemed the harbinger of the result reached
in Turner, where the Ninth Circuit did not even allude to Chapman
in adopting a more functional test.
2. Application of the Test to the to the Instant Facts
 Having concluded that the district court misperceived the
controlling standard, it becomes incumbent upon us to determine
whether Koscot's scheme falls with the standard adopted. The
deference customarily tendered to fact findings rendered by a
district court is inappropriate where, as here, the findings are
tainted by application of an erroneous legal principle. See Rowe
v. General Motors Corp., 457 F.2d 348, 356 n. 15 (5th Cir. 1972);
United States v. Jacksonville Terminal Co., 451 F.2d 418, 423-424
(5th Cir. 1971); United States v. Pickett's Food Service, 360
F.2d 338, 341 (5th Cir. 1966); Ferran v. Flemming, 293 F.2d 568,
571 (5th Cir. 1961).
Our task is greatly simplified by the Ninth Circuit's decision
in SEC v. Glen W. Turner Enterprises, Inc., supra. The promotional
scheme confronting the Ninth Circuit is largely paralleled by
that exposed before this court. Dare to be Great, (Dare) which
like Koscot, is a subsidiary of Turner Enterprises, offered five
plans in its self-improvement program, three of which entitled
an investor to earn money for coaxing additional prospects into
the Dare fold. To a purchaser of a plan denominated Adventure
III, costing $2,000, Dare proffered tutelage on sales motivation
and sales ability and authority to sell Adventures I, II and III.
Remuneration for a sale of each plan amounted to $100, $300 and
$900 respectively. Dare bestowed the same benefits upon investors
of Adventure IV but with the additional opportunity to receive
$2,500 compensation for sales of Adventure IV to new prospects.
This plan cost $5,000. A purchaser of the $1,000 plan would
receive basically the same benefits as would a purchaser of Adventure
II, i.e., the sales material, and was empowered to sell the plan.
Financial gain would inure to him after his seller consummated
a sale with two prospects steered by him to his seller. The purchaser
would then be entitled to sell plans on his own, being remunerated
at $400 per sale. Alternatively a purchaser who lures three people
into the scheme would be entitled to sell the $1,000 plan without
buying it himself.
As in the Koscot scheme, the initial task of a purchaser of a
Dare plan was to lure prospects to meetings, denominated Adventure
Meetings. These were characterized by the same overzealous and
emotionally charged atmosphere at which the illusion of affluence
fostered in Opportunity Meetings was created and relied upon in
securing sales. The Adventure Meetings were run according to
script but, as the Ninth Circuit noted, 'The Dare People, not
the purchaser- 'salesmen', run the meetings and do the selling.'
474 F.2d at 479. Considerable effort was exerted to consummate
the *485 sale at the Adventure Meeting, with the sale sometimes
being closed by the investor but frequently by Dare salesmen.
474 F.2d at 479. The Ninth Circuit's assessment of the significance
of these facts was as follows:
'In this case, Dare's source of income is from selling the Adventures
and the Plan. The purchaser is sold the idea that he will get
a fixed part of the proceeds of the sales. In essence, to get
that share, he invests three things: his money, his efforts to
find prospects and bring them to the meetings, and whatever it
costs him to create an illusion of his own affluence. He invests
them in Dare's get-rich-quick scheme. What he buys is a share
in the proceeds of the selling efforts of Dare. Those efforts
are the sine qua non of the scheme; . . . those efforts are what
produces the money which is to make him rich. In essence, it
is the right to share in the proceeds of those efforts that he
buys. In our view, the scheme is no less an investment contract
merely because he contributes some effort as well as money to
get into it.'
474 F.2d at 482. We conclude that the facts in the instant case can be evaluated along similar lines.
The recruitment role played by investors in Koscot coincides
with that played by investors in Dare to be Great. That investors
in the latter did not participate in Adventure Meetings while
they do in the Koscot scheme in insignificant. Since Koscot's
Opportunity Meetings are run according to preordained script,
the deviation from which would occasion disapprobation or perhaps
exclusion from the meetings, the role of investors at these meetings
can be characterized as little more than a perfunctory one. Nor
does the fact that Koscot investors may have devoted more time
than did Dare investors to closing sales transmute the essential
congruity between the two schemes. The act of consummating a
sale is essentially a ministerial not managerial one, see Mitzner
v. Cardet International, Inc. et al., supra at 1267-1268, one
which does not alter the fact that the critical determinant of
the success of the Koscot Enterprise lies with the luring effect
of the opportunity meetings. As was noted earlier, investors are
cautioned to employ the 'curiosity approach' in attracting prospects.
Once attendance is secured, the sales format devised by Koscot
is thrust upon the prospect. An investor's sole contribution
in following the script is a nominal one. Without the scenario
created by the Opportunity Meetings and Go-Tours, an investor
would invariably be powerless to realize any return on his investment.
 We confine our holding to those schemes in which promoters
retain immediate control over the essential managerial conduct
of an enterprise and where the investor's realization of profits
is inextricably tied to the success of the promotional scheme.
Thus, we acknowledge that a conventional franchise arrangement,
wherein the promoter exercises merely remote control over an enterprise
and the investor operates largely unfettered by promoter mandates
presents a different question than the one posed herein. But
the Koscot scheme does not qualify as a conventional franchising
We are mindful of the caveat expressed by Justice Brennan, concurring
in SEC v. Variable Annuity Life Insurance Co., 359 U.S. 65, 80,
79 S.Ct. 618, 626, 3 L.Ed.2d 640, 649 (1959), that courts should
not assume that merely because subjection of a particular scheme
to federal regulation is desirable, it has been accomplished.
But as Justice Brennan also noted, 'one must apply a test in
terms of the purposes of the Federal Acts.' Id. See also SEC.
v. C. M. Joiner Leasing Corp., supra, 320 U.S. at 350, 64 S.Ct.
at 123, 88 L.Ed. at 93. The test we adopt comports with the principal
purpose of the Securities Acts, as announced in Smallwood v. Pearl
Brewing Company, supra. It also comports with the observation
of the Supreme *486 Court in SEC v. W. J. Howey Co., supra,
328 U.S. at 299, 66 S.Ct. at 1103, 90 L.Ed. at 1250, that the
definition of securities 'embodies a flexible rather than a static
principle, one that is capable of adaptation to meet the countless
and variable schemes devised by those who seek the use of the
money of others on the promise of profits.' We merely endorse
a test which is resilient enough to encompass the egregious promotional
scheme purveyed by Koscot.
Accordingly, this cause is reversed and remanded for further
proceedings consistent with this opinion.
Reversed and remanded.