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From Securities Regulation Daily, October 15, 2015

Fraud claims rejected for failure to show purchase or sale of security

By Kevin Kulling, J.D.

A federal court has dismissed the securities fraud claim of a Pennsylvania company that failed to satisfy the threshold requirement that a purported profit-sharing, licensing, and stock purchase agreement involved the purchase or sale of a security (Northeast Revenue Services v. MID, Inc., October 13, 2015).

The parties. Plaintiff Northeast Revenue Services, LLC, is a Pennsylvania limited liability company. Defendant Maps Indeed, Inc., (MID) is described as a technology company that uses global satellite imagery to provide services to clients, by accessing and sharing geospatial and property data in real time and online. Northeast Revenue and MID entered into a “profit sharing, licensing and stock purchase option agreement” which required Northeast Revenue to market MID’s proprietary software to Counties and Municipalities in the Commonwealth of Pennsylvania, and assist MID with the setup and maintenance.

Motion to dismiss. The key question before the court on defendants’ motion to dismiss was whether the alleged misconduct involved the purchase or sale of securities.

The court analyzed the motion to dismiss in light of the Supreme Court’s test enunciated in SEC v. W.J. Howey, which requires that in order to show the existence of an investment contract, and thus a security, a plaintiff must show: (1) an investment of money, (2) in a common enterprise, (3) with profits to come solely from the efforts of others.

While the parties did not dispute the existence of the first two prongs of Howey, Northeast Revenue argued that the agreement as a whole was a security because the intended profits were expected to derive largely from the efforts of individuals other than plaintiff, and that its duties under the agreement requiring it to market the software and assist with set up and maintenance, were “minimal.”

MID contended that the revenue sharing agreement was not a security because it involved the sharing of revenue, not profit, and the revenue was derived from Northeast Revenue’s own sales efforts, and not solely from the efforts of others.

Holding. The court held that under the agreement Northeast Revenue was required to make significant efforts, as the benefits promised by the agreement were based directly on Northeast Revenue’s duties. The agreement required the company to market MID proprietary software to Counties and Municipalities within the Commonwealth of Pennsylvania. In addition, the company was required to assist with the setup and maintenance of its geospatial information system. In terms of compensation, Northeast Revenue agreed to pay MID $150,000 and as additional compensation, it agreed to pay MID 25% of all revenue generated. The agreement required Northeast Revenue to meaningfully participate and have more than minimal control over the investment’s performance. The profits were dependent upon plaintiff marketing MIDs software to counties and municipalities, according to the court.

Accordingly, because profits under the agreement were not derived solely from the efforts of others, the agreement was not a security and the securities fraud claims were dismissed.

The case is No. 3:14-cv-00852.

Attorneys: John G. Dean (Elliott Greenleaf & Dean) for Northeast Revenue Services, LLC. Andrew J. Katsock, III (Law Offices of Andrew J. Katsock, III) for Maps Indeed, Inc. and Victor Deanthony. Kevin J. Mangan (Womble Caryle Sandridge & Rice LLP) for Insequence, Inc.

Companies: Northeast Revenue Services, LLC; Maps Indeed, Inc.; Insequence, Inc.

MainStory: TopStory FraudManipulation PennsylvaniaNews

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