Edward Lee (Chicago-Kent College of Law – Illinois Institute of Technology) has posted The Original Public Meaning of Investment Contract (UC Davis Law Review, Vol. 58, 2024) (62 pages) on SSRN. Here is the abstract:
The SEC has failed to provide the public with any guidance on its treatment of artwork NFTs under securities law. Instead, in nonprecedential enforcement actions against two NFT projects in 2023, the SEC classified the NFTs, which involved digital artworks, as unregistered “crypto asset securities”—a term nowhere in the text of the Securities Act of 1933. But this Article explains why the SEC’s overbroad treatment of artwork NFTs raises a serious First Amendment problem. For the SEC to require creators to register their artwork NFTs as securities before they can be offered to the public constitutes an unlawful prior restraint.
Courts should reject the SEC’s approach and adhere to the original public meaning of “investment contract” in the Securities Act. Providing original historical research of newspapers and dictionaries before and contemporaneous with the enactment of the Securities Act in 1933, this Article shows that people used “investment contract” as early as the 1800s to refer to an investment in a contract. Under its original public meaning, an investment contract requires a certain type of quid pro quo: a person’s investment of money, the quid, in exchange for a contractual right of the investor to receive a share in profits generated solely by the offeror’s efforts, the quo. Absent this quid pro quo, there is no investment contract. In 1920, the Minnesota Supreme Court recognized this original public meaning—“as commonly used and understood”—in State v. Gopher Tire, and, then, in 1946, the U.S. Supreme Court adopted the same original public meaning in SEC v. W.J. Howey Co. Indeed, every state and federal decision interpreting “investment contract” that Howey cited and every Supreme Court case applying Howey afterwards involved this quid pro quo. The federal courts have correctly rejected attempts to classify art sales as investment contracts. The reason is straightforward: Even though the purchase of art is an investment, it is not an investment contract. The buyer of art receives no quo, or contractual right to receive a share in the profit generated solely by the offeror’s efforts. Instead, the buyer receives art. The same holds true with the sale of artwork NFTs: the buyer receives artwork NFTs, not any contractual right to profits from the offeror.
I'm struck by the author's use of "original public meaning" in the title of an article about a statute. It's common for scholars, lawyers and judges to assume or assert that what matters in statutory interpretation is the statute's meaning at the time of enactment. I don't know that it's often called the "original public meaning," a term that usually appears in constitutional analysis. But there's no reason why it shouldn't be, and merging the terminology of statutory interpretation and constitutional interpretation reflects the view that those are really just part of the same enterprise — legal interpretation. That commonality, for example, is a theme that runs through Scalia and Garner's book, which is of course "Reading Law", not "Reading Constitutional Law" or "Reading Statutory Law"; they use examples from each enterprise interchangeably. To the extent some versions of constitutional originalism or statutory originalism deny this commonality, it would be interesting to explore why they do.
Posted at 6:28 AM