If securities are legal claims, only lawyers should be in the position to provide advice for compensation

Roumen Manolov
Roumen Manolov is the sole owner of Tangra Law Firm LLC. Manolov is originally from Bulgaria, where he practiced law for five years before moving to the United States. Manolov received his J.D. from Sofia University, Bulgaria; L.L.M. in business law from Staffordshire University, UK; and L.L.M. in comparative law from University of San Diego. He is admitted in Missouri, New York, and Bulgaria. He can be reached at roumenmanolov@hotmail.com, or at manalovlaw@icloud.com. 

This article explores the origin and development of the concept of “securities” and takes the position that securities should be treated for what they really are — legal claims. Therefore, ideally, only persons licensed to practice law should be in the position to provide advice or counsel regarding securities.

The Practice of Law in Missouri and How It Relates to Securities

Section 484.020 RSMo provides, in pertinent parts: “No person shall engage in the practice of law or do law business, as defined in § 484.010, or both, unless he shall have been duly licensed therefor and while his license therefor is in full force and effect.”

The Supreme Court of Missouri, however, has explicitly stated that “the judiciary is necessarily the sole arbiter of what constitutes the practice of law.”² Statutes may aid by providing machinery and criminal penalties but may not extend the privilege of practicing law to persons not admitted to practice by the judiciary.³  Such statutes are merely in aid of, and do not supersede or detract from, the power of the judiciary to define and control the practice of law.⁴

According to the Court, “[t]he General Assembly cannot interfere with the Court’s power to determine what is the unauthorized practice of law.”⁵  In Eisel v. Midwest BankCentre, for example, after the trial court ruled against the defendant but before the Supreme Court rendered its decision, the legislature enacted a new statute providing that a bank or lending institution that makes residential loans and imposes a fee of less than $200 for completing documentation shall not be deemed to be engaging in the unauthorized practice of law.⁶ The Court disregarded the new section and explicitly stated that it “does not affect this Court’s ability to enjoin or otherwise punish such fees if they constitute the unauthorized practice of law.”⁷

The issue of what constitutes the practice of law is of the sole authority of the judiciary and cannot be arbitrated. “One cannot consent to the unauthorized practice of law, such that there can be no waiver of protections of § 484.010.”⁸

What is the connection between the practice of law and securities? In in re Mid-America Living Trust Associates, Inc., the Court ordered that “Mid-America and its non-lawyer agents, servants, employees, and trust associates cease soliciting, counseling, recommending, and selling trusts, wills, and all other legal instruments (emphasis added) for valuable consideration to Missouri residents.”⁹  The Court found that these actions constitute the practice of law.

On the other hand, the Missouri Securities Act of 2003 defines a broker-dealer as a person engaged in the business of effecting transactions in securities, and an investment adviser as a person that, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or the advisability of investing in, purchasing, or selling securities.¹⁰

The key factor here is the fact that all securities are legal instruments evidencing legal claims. Thus, all actions used by the Missouri Securities Act to develop the definitions for broker-dealers and investment advisers are determined by the Supreme Court of Missouri to constitute the practice of law.

The holding of the Supreme Court of Missouri, when applied to securities, should require that only lawyers be allowed to be engaged in counseling, recommending, and selling legal instruments (which include securities) for valuable consideration. The provisions of the Missouri Securities Act, however, create a controversy even regarding this fact.

Under § 409.1-102(15)(B) RSMo, a lawyer, whose performance of investment advice is solely incidental to the practice of the person’s profession, is not an investment adviser. If the performance of investment advice is the purpose of this lawyer’s services, the lawyer would be required to register as an investment adviser. This begs the question: Why should a lawyer be required to register with the SEC or the Missouri Securities Division to provide advice for compensation regarding legal instruments evidencing legal claims? Clearly, this activity constitutes the practice of law.

Although the term “legal instrument” includes securities, it is a term of art and does not reveal their true nature. The next sections of this paper will demonstrate that securities are nothing more that legal claims and, therefore, should be handled only by lawyers.

Nobody Knows What a Security Is

In the United States, the definition of securities is so unclear that nobody knows what they actually are. The statutory definition of securities is a laundry list of 31 instruments to be considered securities, which, according to the plain text of the statutes, may not be securities after all, if “the context requires otherwise.”¹¹

Instead of identifying the common elements that bind these 31 items together, Congress decided to list the instruments and proclaim them to be securities because the statutes defined them as such.  

The U.S. Supreme Court has further contributed to the confusion with its inconsistent interpretation of the “context” clause. In some cases, the Court established specific individual tests to determine when particular instruments could be treated as securities.¹²

However, the Court refused to examine under the “context” phrase a transaction involving shares of common stock and declared that, “[u]nder the circumstances of this case, the plain meaning of the statutory definition mandates that the stock be treated as ‘securities’….”¹³  In a subsequent case, the Court explained its position by stating that “the public perception of common stock as the paradigm of a security suggests that stock, in whatever context it is sold, should be treated as within the ambit of the [Securities] Acts.”¹⁴

Thus, the reason why some securities are a “paradigm of a securities” and others are not, the Court left entirely to one’s own imagination. (The position of the U.S. Supreme Court about stock certificates is awkward from a purely legal standpoint because historically, at common law, all securities were legal claims, as opposed to stock certificates, which were equity claims created by the ingenuity of lawyers to avoid law; in that regard, many lay persons refer to stock certificates as “equity” without knowing the real meaning of the term).¹⁵

One hundred thirty years before the U.S. Supreme Court decided “the public perception of common stock as the paradigm of a security,”¹⁶ the legal authorities uniformly had the opposite view. In this regard, for example, is the 1856 decision of the Court of Appeals of New York in Mechanics’ Bank v New York & New Haven R.R. Co., finding that certificates of stock were not securities.¹⁷

Professor Seymour D. Thompson, the author of “The Commentaries on Law of Private Corporations,” a treatise regarded as the highest authority on corporations in the 19th century, also took the firm position that “shares cannot in any proper sense be regarded as money or securities for money.”¹⁸

The history of these two contradicting legal analyses is an example of the serious structural flaws of securities law. The transformation in the treatment of stock certificates from not being securities to being “the paradigm of a security” was based not on solid legal arguments but solely on public perception. As Chief Justice Winslow of the Wisconsin Supreme Court put it in 1912: “While the word ‘securities’, construed strictly, does not cover corporate stock, but rather bonds or evidences of debt, it has undoubtedly acquired a much broader meaning by general usage.”¹⁹

In his dissent in Donovan’s Estate, Judge Sinkler also criticized the reliance of the courts on the public perception when construing securities law and stated: “The term ‘security’ used in its relation to the investment….should be judicially construed not according to the vernacular use but in its accurate sense. So construed the term “security” does not include shares of stock in a corporation as a class.”²⁰

All rules in a modern legal system should be well-defined and logically developed by the application of consistent legal principles. Currently, shares of common stock are securities because of a statutory definition, but their inclusion in the original securities statutes was based solely on the general public perception and not on a consistent legal analysis. Imagine if, instead of applying strictly construed penal codes, criminal courts were delivering their verdicts based on the perceptions of the general public about crimes. The securities laws should not be different.

At Common Law, Securities Were Classified as “Choses in Action”

The legal concept of “securities” is unique in that it can be properly understood only if analyzed in relation to its historical development.

It could be traced back to the old common law concept of “choses in action.” All personal items were considered either in possession or in action.²¹ “In the first case, the owner has not only the right to enjoy, but also the actual enjoyment of the thing; in the latter, he has merely a bare right, without any occupation or enjoyment. This property in action is called […] ‘Chose in Action’.”²²

The term was known as far back as the reign of Edward III of England and originally was applied to a right to bring a personal action.²³ By 1542, all rights of action, whether enforceable by real or by personal actions, were considered choses in action.²⁴

During the 16th century, choses in action were extended from a right to bring an action to the documents which were necessary evidence of such a right.²⁵ Thus, in 1535, a bond was said to be a chose in action, and during the 17th, 18th, and 19th centuries, documents as negotiable instruments, stock, shares, policies of insurance, and bills of lading were also declared as such.²⁶

Initially, choses in action were non-assignable because they were essentially personal rights.²⁷ According to William Holdsworth, however, the common law courts, following the equity courts, eventually accepted the assignability of choses of actions in connection to debt obligations because of mercantile convenience or necessity.²⁸ Ultimately, the courts accepted that a negotiable instrument was a chose in action even before maturity and could be transferred by assignment in the same manner as an ordinary chose in action.²⁹

It is very important to emphasize that the exception to the principle that a chose in action could not be assigned applied only to debts. Even equity did not go so far as to permit the assignment of all choses in action because some of them were too personal, and others were too uncertain. 

The courts in Missouri very early and unequivocally ruled on the transferability of choses in action. In 1853, the Supreme Court of Missouri had to decide as to whether the assignee of a debt may sue for the debt in assignee’s own name.³⁰ The Court stated: “The effect of our new code of practice in abolishing the distinction between law and equity, is to allow the assignee of a chose in action to bring suit in his own name, in cases where, by the common law, no assignment would be recognized.”³¹

It is interesting that in the same decision, the Court in dictum stated: “How far the statute which directs the mode of assigning bonds and notes is affected by this change in our mode of proceeding, we will not now say.”³² It appears members of the Court realized the potential effect of the new civil procedure rules on the development of a market for bonds and notes and, at least initially, intended to prevent such a development. Americans in the first half of the 19th century constantly associated the financial markets with gambling.³³

At Some Point in History, People Began to Perceive “Choses in Action” as “Real Items”

There are important distinctions between legal and economic forms of investments. Briefly, at the economic level, all forms of “investment” constitute loans. Very often, entrepreneurs are compelled to borrow money from other persons who in return expect to receive their money back along with interest. For this reason, at the legal level, the law creates legal claims for the lenders. Depending on the complexity of the rights and obligations attached to these legal claims, the loans can take different legal forms.

The keys to understanding the development of these legal forms are the barriers that inhibit the circulation of money capital.³⁴  When capital exists as money, it is exchangeable, liquid, and mobile. Once “loaned,” it becomes tied to specific assets, and a problem may arise when lenders are not willing to give up control of their money for long periods of time.³⁵

Historically, this problem was solved by the establishment of legal claims markets in form of choses in action. Because the common law courts had gradually changed the laws to accommodate the necessity for these legal claims to become transferable, they appeared less like personal rights to action and very much like rights to property. But one should not be mistaken: the appearance of being “property” did not change in any way the nature of these choses in action as being legal claims. 

The distinction between economic and legal forms of investments is very important. Value could be created only in the process of production of goods and services. According to Daniel Raymond, an early political economist in the United States, “[t]here is a prevailing error or vice which runs through most works on political economy. They talk about the relative productiveness of capitals employed in different ways, instead of the relative productiveness of labor employed in different ways.”³⁶ All legal forms of investment, no matter how complex, do not create value.

There are many different legal forms of investments, which are distinguishable by the legal rights they convey to their holders. The first legal form of loaned money was a simple contract of loan. By the 18th century, such legal forms developed into bills, notes, government stock, shares of common stock, etc. Currently, the most complex legal forms include investment companies, pension funds, hedge funds, derivative instruments, and more.

The misperception that value could be created by creating better products through regulations is very well settled in the legislative and the executive branch. For example, the Securities Act of 1933 contains several exemptions from its registration requirements and requires that the SEC adopt rules regarding these exemptions.³⁷ In June 2020, because of the complexity and confusion created by the exempt offering framework, the SEC decided to promulgate a new rule.³⁸

It is evident that the SEC, by creating a new rule, is attempting to create a better “product” for small business capital formation. It is also easy to predict that the new rule would further complicate the matter and that, until the commission begins to look at the underlying social relationships of securities, the framework will keep getting more confusing.

Another example of the “property” assumption regarding securities could be found in the 2009 case State of Missouri v. Stifel, Nicolaus & Co.³⁹ At issue in this case were the so-called “auction rate securities,” which were long-term bonds issued by municipalities, corporations, and student-loan companies, with variable interest rates that reset through an auction. After the collapse of the financial markets in 2008, these auctions failed, and the investors couldn’t resell their securities as promised and got stuck with instruments that took, on average, 30 years to mature.

Although the case was settled out of court, the litigation positions of the parties were quite revealing. The State of Missouri filed its claim partially based on § 407.020 of the Missouri Merchandising Practices Act.⁴⁰ The fact that the securities in this case were treated as merchandise demonstrates how deeply embedded the “property” illusion is.

Modern mind has arrived at a fiction where the intrinsic productivity of money and other types of financial instruments is never questioned. Instead of exploring the complexity of the underlying social relationships, lawyers have accepted the different forms of investments as legal objects and tangible items. The result is the reification of investments as things in themselves.

The “Property” Illusion Began When Stock Certificates Became Securities

All instruments listed by the securities statutes as securities are debt instruments – except shares of common stock.⁴¹ The shares stand out alone because, in the dual Anglo-Saxon legal system, they were the only “product” that came out of equity. However, after stock certificates were comingled statutorily without any legal criteria with all other securities, it is their appearance of “ownership” that affected the other instruments and created the illusion that securities were tangible items.

The share of common stock does not fit into any normal legal category.⁴² Many jurisdictions, most notably the United States, have not developed a consistent legal definition. So far, the most these jurisdictions have done is define stock certificates by referring to the rights they confer to their shareholders, namely the right to receive dividends, the right to receive liquidation distributions, and the right to vote at shareholders’ meetings. (This is, for example, how Facebook described its shares of common stock in its prospectus with the SEC).⁴³ Thus, despite the general acceptance of the “ownership” assumption, the rights attributed to stock certificates cannot be associated in any way with the legal categories and concepts developed by real estate and personal property laws.  

Similarly to securities, the legal concept of shares of common stock can be properly understood only if analyzed in relation to its historical development. According to Professor Paddy Ireland, the legal antipathy to usury historically influenced the notion of shares of common stock as well as the law of partnership and corporation.⁴⁴

According to Ireland, for most canonists and jurists in the middle ages, there was a world of difference between usury, profit obtained from a contract of loan, and justifiable returns derived from partnerships – where there was a sharing of risk and venture of capital.⁴⁵ Ireland also cites Thomas Aquinas, who emphasized that the issue of risk was itself bound up with the issue of ownership.⁴⁶

This theory of the canonists was received, in significant part, into civil law as well as in England, where usury was clearly illegal. As the economic foundations of society changed, more and more ways in which usury laws could be circumvented emerged, and more and more methods of investment were recognized as legitimate by both religious and secular authorities.⁴⁷

Criterion for distinction was explained by English jurist William Blackstone in the 1700s: if the profit or premium was certain and defined, it was a loan; if it was indefinite, and depending on the accidents of the trade, it was a partnership.⁴⁸ Thus, according to Ireland, “‘lenders’ who received interest (a return ‘certain and defined’) were distinguished from ‘partners’ who received a share in profits (a return ‘casual, indefinite and depending on the accidents of trade’), although both received the return on their capital in the same form – as a reward for the mere ownership of money.”⁴⁹

Despite having some nominal control over the partnership, most partners never wanted to be anything more than rentier investors. To better protect the interests of the partners, a new branch of law emerged: the law of corporations.

Two core concepts of corporate law – separate personality and limited liability – were designed to keep shareholders closer to the role of lenders rather than partners. The only purpose of these concepts was the limitation of shareholders’ exposure to risk, the same element that was initially used by lawyers to make lenders look like “owners” so they could go around the strict usury laws.

As far back as 1798, in Russell et al. v. Temple and others, the Supreme Court of Connecticut was very clear on this topic: “the individual member, or shareholder, had only a right of action for a sum of money, his part of the net profits or dividends.”⁵⁰ Shareholders have always been only holders of legal claims, and stock certificates are nothing more than what all other securities are – contractual obligations creating legal claims.

How the Markets Determine the “Real Value” of Securities 

All securities instruments are nothing more than existing contracts promising payments in the future and creating legal claims for the holders of these instruments. The periodic income which shareholders receive in the form of dividends or holders of debt instruments receive in the form of interest, is capitalized in the same way.

For example, the value of a share of common stock is the sum of money which would demand, at the prevailing rate of interest, a return equivalent to the income actually accruing to the share.⁵¹ So, if the prevailing rate of interest is 10%, a share whose nominal value is $100 and pays $20 in dividends annually would have a market value of $200, because when the dividend is capitalized at 10%, it would represent a capital of $200. On the other hand, a $100 nominal value share paying only $5 annually would represent a capital of only $50.

The value of the share represents the capitalized legal claim on the generated value by a company in the process of production and not by the value of the company’s actual assets.⁵² Stocks that do not pay dividends are worthless because they do not provide their holders with legal claims on anything valuable.⁵³

The stock markets make the same sum of money appear twice: once as equipment and inventory of the formed corporation, which will be used to produce value, and the second time in the form of stock certificates, which is capital outside of the production process. According to German economist Rudolf Hilferding, “the second capital is illusion.”⁵⁴

Today, the distortion of reality by the financial markets is significantly greater because of the combination between historically low prevailing interest rates and various “financial products.”⁵⁵ If, for example, a corporation wants to issue stock certificates to raise $100 for the purchase of equipment that would produce value and distribute dividends of $10 annually, at a prevailing interest rate of 1% (for this example, Goldman Sachs’ annual certificate-of-deposit rate of 1% will be used as the prevailing interest rate⁵⁶), the corporate stock would be valuated at the astonishing $1,000.⁵⁷

Furthermore, if the stock of the corporation is purchased on the secondary market for $1,000 by an exchange-traded fund (a lay term for what is defined by the Investment Company Act of 1940 as a closed-end company⁵⁸), this fund would need to issue in return its own stock certificates for $1,000. This is because closed-end companies are investment companies engaged primary in the business of investing, reinvesting, or trading in securities and cannot issue stock certificates, the face value of which is smaller than the value of the actual assets owned.⁵⁹

Suddenly, the assets of the corporation in accounting (and also legal) sense will appear at three levels. There will be only $100 in real assets but the stunning amount of $2,000 in accounting and legal assets. (The size of the accounting assets would grow even bigger when other accounting “products,” such as put or call options, straddles,⁶⁰ and security-based swap agreements⁶¹ are added to the equation.)  “Only the production capital and its profit really exists, but it does not prevent the fictitious (stock) capital from existing in an accounting and legal sense, although in reality it is not capital, but only the price of claims to revenue.”⁶²

The financial markets have created a line of legal claims which could be satisfied only by a limited amount of real assets. Whether a claim could be satisfied would depend entirely on the types of rights it confers to its holders, the size of the actual assets, the number of claims competing over the real assets, and other factors. Only a person trained in law could be in the position to assess all competing claims.

Conclusion

Securities are very complicated legal instruments. Securities are complex legal claims creating legal rights and obligations which very often compete with other rights and obligations. Only a person trained in law could properly evaluate all different aspects of securities.

For more than 100 years, society has believed that securities are tangible items with intrinsic value. This has allowed the creation of an entire industry that trades in securities under the false assumption that it creates value when in fact it creates more legal claims. As a result, the current number of legal claims significantly exceeds the size of wealth available to satisfy these claims.

It looks like it is time for lawyers to reclaim their authority over securities.

Endnotes

1 Roumen Manolov is the sole owner of Tangra Law Firm LLC. Manolov is originally from Bulgaria, where he practiced law for five years before moving to the United States. Manolov received his J.D. from Sofia University, Bulgaria; L.L.M. in business law from Staffordshire University, UK; and L.L.M. in comparative law from University of San Diego. He is admitted in Missouri, New York, and Bulgaria. He can be reached at roumenmanolov@hotmail.com, or at manalovlaw@icloud.com.  

2 Eisel v. Midwest BankCentre 230 S.W.3d 335, 339 (Mo. banc 2007).

3 Hulse v. Criger, 247 S.W.2d 855, 857 (Mo. banc 1952).

4 Automobile Club of Mo. v. Hoffmeister, 338 S.W.2d 348, 354-55 (Mo. App. E.D. 1960).

5 See Haggard v. Division of Employment Sec., 238 S.W.3d 151, 153 (Mo. banc 2007).

6 See Section 484.025, RSMo.

7 See EIsel at 340, n5.

8 See Haggard v. Division of Employment Sec., 238 S.W.3d 151, 154 (Mo. banc 2007).

9 In re Mid-America Living Trust Associates, Inc., 927 S.W.2d 855, 871 (Mo. banc 1996)

10 See Section 409.1-102 (4) and § 409.1-102 (15), RSMo.

11 See 31 U.S.C. § 5103. See also Section 409.1-102 (28), RSMo.

12 So far, the Court has analyzed the “context” clause only regarding certificates of deposits (Marine Bank v. Weaver, 455 U.S. 551, 560 (1982)), promissory notes (Reves v. Ernst & Young, 494 U.S. 56, 63 (1990)), and investment contracts (S.E C. v. W J. Howey Co., 328 U. S. 293 (1946)).

13 Landreth Timber Co. v. Landreth, 471 U.S. 681, 687 (1985).

14 See Reves v. Ernst & Young, 494 U.S. 56 (1990).

15 In 1720, the British Parliament enacted the Bubble Act. It established the four pillars that later became the foundation of all current securities law statutes: the sale of stock in an unchartered enterprise was deemed to be a public nuisance; the violators of this rule were subjected to penalties, which typically included imprisonment and the forfeiture of property to the crown; any person suffering a loss was provided with a cause of action for treble damages; and brokers who bought or sold shares of unchartered enterprises would lose their licenses and forfeit £500 to the government, one half of which would be available to the informant who revealed the broker’s conduct.  See Stuart Banner, Anglo-American Securities Regulation: Cultural and Political Roots, 1690-1860, 76 (1998).

According to the British author Colin Cooke, though, the Bubble Act failed to account for the ingenuity of lawyers, who started to use Deed of Settlement to go around the provisions of the Act. Property was held on trust for its members by trustees who undertook in the deed of settlement to apply it for the benefit of the members, in pursuit of the company’s purposes as set out in the deed. The members of the trust (shareholders) were removed from direct involvement in the day-to-day management of the business, which was conducted on their behalf by a board of directors. The members also mutually covenanted to be bound by all the terms of the deed, one of which provided for the transferability of shares. In this way, through the device of the Deed of Settlement Company, many companies were formed within the shadow of the Bubble Act. They developed within the bound of equitable jurisdiction and did not trouble the common law courts with the problems of their existence. See Colin Arthur Cooke, Corporation, Trust, and Company 85 (Manchester University Press 1950).    

16 Reves v. Ernst & Young, 494 U.S. 56 (1990).

17 See Mechanics’ Bank v New York & New Haven R.R. Co. 13 N.Y. 599, 627 (1856).  “Looking at the question upon principle, I am not aware of anything in the nature or uses of this kind of property which requires an application of the rules which belong to negotiable securities. Stocks are not like bank bills, the immediate representative of money, and intended for circulation. The distinction between a bank bill and a share of bank stock it is not difficult to appreciate. Nor are they, like notes and bills of exchange, less adapted to circulation, but invented to supply the exigencies of commerce,*627 and governed by the peculiar code of the commercial law. They are not like exchequer bills and government securities, which are made negotiable either for circulation or to find a market. Nor are they like corporation bonds, which are issued in negotiable form for sale, and as a means for raising money for corporate uses. The distinction between all these and corporate stocks is marked and striking. They are all in some form the representative of money, and may be satisfied by payment in money at a time specified. Certificates of stock are not securities for money in any sense, much less are they negotiable securities.” Id.

18 See Seymour D. Thompson, L.L.D., The Commentaries on Law of Private Corporations, Vol. IV 87 (The Bobbs-Merrill Company 2d ed. 1909). Professor Thompson cited a case, Graydon v. Graydon, 23 N.J. Eq. 229, where the court stated: “Bonds, mortgages, notes, bills of exchange, and matters of like nature are securities for money. Shares of capital stock are never called securities.” Id.

19 See In Will of Stark, 149 Wis. 631, 657 (1912).

20 Donovan’s Estate, 28 D. & C. 93, 106 (Pa. D. & C., 1937).   

21 See James Kehoe, A Treatise on the Law of Choses in Action 2 (Carswell & Co., Law Publishers 1881), See also John R Dos Passos, A Treatise on the Law of Stock-Brokers and the Law of Stock-Exchanges 480 (Harper & Brothers, Franklin Square, New York 1882).

22 Kehoe, at p.2.

23 Id. at 1001.

24 Id. at 1010-1011.

25 See id. at 1011.

26 Id.

27 See id. at 1016.

28 See id. at 1021-1022. As early as the 14th century, merchants began to circumvent the prohibition. If the right was to an ascertained sum of money, i.e. debt, then the creditor could appoint the assignee an attorney to sue for the debt and could stipulate that the attorney should keep the amount realized; in the 15th century, this method of assigning a debt was recognized as valid by the common-law courts.

29 See John R Dos Passos, A Treatise on the Law of Stock-Brokers and the Law of Stock-Exchanges  482 (Harper & Brothers, Franklin Square, New York 1882).

30 See Walker v. Mauro, 18 Mo. 564 (1853).

31 Id. at 565.

32 Id. at 565-566.

33 See Stuart Banner, Anglo-American Securities Regulation: Cultural and Political Roots, 1690-1860207 (1998).

34 See Paddy Ireland, Ian Grigg-Spall & Dave Kelly, The Conceptual Foundations of Modern Company Law, 14 J. of L and Soc’y, 156, (1987).

35 Id.

36 Daniel Raymond, The Elements of Political Economy in Two Parts 359 (2nd ed. Lucas, Jun. and E.J. Coale, Baltimore 1823). The misperception about capital productivity was strongly criticized by many American authors. Thomas Jefferson, in one of his letters to John Eppes, stated: “Capital may be produced by industry, and accumulated by economy; but jugglers only will propose to create it by legerdemain tricks with paper.” (The Papers of Thomas Jefferson, 11 March to 27 November, Vol. 6 490–499 (J. Jefferson Looney ed.,Princeton University Press2009). According to Stephen Simpson, the chiefcashier of the Bank of the United States, established by Congress in 1791, “capital in itself is not an active agent of wealth, but a passive instrument, whose ability to produce depends on its application by the hands of labour.” (Stephen Simpson, Working Man’s Manual: A New Theory of Political Economy 55 (Thomas L. Bonsal 1831). John Pickering, another prominent economist, defined capital as “that amount of the products of labor, of any and every kind, which remains over and above consumption during the time of production; in other words, surplus labor.” See John Pickering, The Working Man’s Political Economy 56 (1847).

37 Throughout the years, the SEC has created different rules (which in their minds means different types of securities), including Rule 504, Rule 505, Rule 506 (b) and 39(c), Regulation A, Regulation A+, crowdfunding, intrastate offerings, and more.

38 The new rule, according to the SEC, is intended to “simplify, harmonize, and improve certain aspects of the exempt offering framework to promote capital formation while preserving or enhancing important investor protections.” See Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets (proposed Mar. 4, 2020) (to be codified at 17 C.F.R. pts. 227, 229, 230, 239, 249, 270, and 274), https://www.sec.gov/rules/proposed/2020/33-10763.pdf.

39 See State of Missouri v. Stifel, Nicolaus & Co., 648 F.Supp.2d 1095  (E. D. Mo. 2009).

40 This section bans, among others, misrepresentation of any material fact in connection with the sale or advertisement of any merchandise in trade or commerce.

41 There is another specific security that is not a debt instrument and is defined as “a fractional undivided interest in oil, gas, or other mineral right.” (See 31 U.S C. § 5103). Although it is not within its topic, this paper will offer a possible explanation about the origin and treatment of this security since it has ever been researched. Article IV, § 12 of the Constitution of the New York Stock Exchange, as revised Sept. 15, 1878, created a committee on the so-called “mining securities.” The committee was in charge of all applications for placing of these securities on the exchange’s list and also of adjudication of all disputes in regard to these securities. (See Dos Passos 814). These securities were created after George Bissell, a New York attorney, began raising money in 1854 to collect oil from Titusville Spring. As a result Bissell, a Connecticut banker named James Townsend, and others formed what ultimately became the first oil company –the Seneca Oil Company. (See Ron Baker, A Primer of Oilwell Drilling 6 (Petroleum Extension Service, University of Texas 2001). The first oil companies were unchartered and functioned under the legal form of general partnerships. The general partners owned the property of the partnership in tenancy and this real interest is defined as an undivided interest in the whole property. This specific security is irrelevant today because all entities in the oil and mining industry are corporations and the mineral rights are owned by the separate entity and not the shareholders.

42 Cited by Paddy Ireland, Company Law and the Myth of Shareholder Ownership 2 (1999)   (unpublished article) (on file with Kent Academic Repository).

43 Facebook, Inc., Registration Statement (Form S-1) 130 (Feb. 1, 2012).  https://www.sec.gov/Archives/edgar/data/0001326801/000119312512034517/d287954ds1.htm#toc287954_16.

44 See Paddy Ireland, Company Law and the Myth of Shareholder Ownership 3 (1999) (unpublished article) (on file with Kent Academic Repository).

45 See Id. at 4.

46 See Id. at 5.

47 See Id. at 6.

48 See Id.

49 See Id.

50 This case is reported and analyzed by Justice Thurman of the Supreme Court of Ohio in Johns v. Johns and others, 1 Ohio St. 350, at 354 (1853).

51 See Paddy Ireland, Ian Grigg-Spall & Dave Kelly, The Conceptual Foundations of Modern Company Law, 14 J. of L and Soc’y, 156, (1987).

52 Id.

53 “If investors lacked such an expectation [of receiving dividends], nobody would be willing to buy the security. It would have zero value.”  CFA Institute, Equity and Fixed Income 139 (CFA Program Curriculum, Vol. 5, 2010). A simple legal analysis could confirm that. Every share is a legal claim that gives its holder the right to claim dividends, the right to vote at shareholders meetings, and the right to claim a liquidation quota upon liquidation of the company. Because shareholders don’t get monetary gains from participating in shareholders meetings, and because, by definition, these stocks pay no dividends, a shareholder could earn money only when the company is liquidated and the assets are cashed out.  If a company is healthy, the promoters will never liquidate it. A liquidation could happen only if the company becomes insolvent, but in this case the shareholders would receive less, probably nothing, from their initial investment. The only opportunity for a shareholder to realize a gain could occur only if another investor is willing to buy the shares from the initial shareholder at a higher price. Investments where the only possibility for profit for the initial investors comes from other investors’ money are defined as financial schemes.

54 See Paddy Ireland, Ian Grigg-Spall & Dave Kelly, The Conceptual Foundations of Modern Company Law, 14 J. of L and Soc’y, 156, (1987).

55  On July 29, 2020, the Federal Reserve decided to maintain the federal funds rate at 0 to 1/4 percent (see Press Release, Board of Governors for the Federal Reserve System, Federal Reserve Issues FOMC Statement (July 29, 2020) (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200729a.htm). Also, one-year treasury bills on the secondary market currently pay only 0.14% interest (see Selected Interest Rates, https://www.federalreserve.gov/releases/h15/).

56 Marcus by Goldman Sachs: The high-yield Online Savings Account you deserve, https://www.marcus.com/us/en/savings/high-yield-savings.

57 The capitalization of $10, given 1% prevailing interest rate, equals $1,000 (10 divided by 1% = 1,000).

58 See 15 U.S.C. § 80a-3.   

59 See 15 U.S.C. § 80a-23.   

60 See 7  U.S.C. § 1a (45).

61 See 15 U.S.C.§ 77b-1.

62 See Paddy Ireland, Ian Grigg-Spall & Dave Kelly, The Conceptual Foundations of Modern Company Law, 14 J. of L and Soc’y, 156, (1987).