The Securities and Exchange Commission brought charges against Joseph Signore and Paul Lewis Schumack, II in connection with an alleged investment fraud concerning the sales and marketing of a “Virtual Concierge” machine. The machine looks like an ATM, but carries advertising and can print tickets and coupons. It looks shady, but a machine alone is not a security. Does the SEC have jurisdiction?
According to the SEC complaint, Signore and Schumack offered two investment options. The first is the aggressive option. The investor is responsible for placing the machine. The second option is the passive option where the investor makes an investment and lets the company do the work in exchange for a guaranteed payment of $300 per month.
Under the passive option, the investment arrangement could be considered an “investment contract” under the definition of a security. I assume the court will use some derivation of the Howey case to determine if there is an investment contract, and look at whether there is
- an investment of money,
- a common enterprise,
- a reasonable expectation of profits, and
- a reliance on the entrepreneurial or managerial efforts of others.
I would guess that the aggressive option would not meet the test. But the passive option is likely to meet the test. The virtual concierge investors pay $3500, do nothing, and get $300 per month. It sounds like the investors are relying on the managerial efforts of others to generate profits.
The virtual concierge contractual arrangement sounds a lot like the orange grove investment in Howey. The actual investment is in real estate or a tangible good. But the investment is wrapped with a management contract that turns the investment into a passive investment that is likely to meet the definition of an “investment contract.”
From the criminal complaint, it sounds like Schumack and Signore were very good at convincing people to make the investment. A confidential witness states that they sold approximately 16,000 units. However, the company was only able to place 46 machines.
Of course, this story is based solely on the government’s accusations and the defendants have not had an opportunity to respond the charges. The story caught my eye as part of my continuing to quest to define a “security.”
References:
- SEC, Criminal Authorities Halt Florida-Based Ponzi Scheme Targeting Investors Through YouTube Videos
- SEC complaint
- Criminal complaint against Signore and Schumack (.pdf)
- United States Attorney and SEC Act Cooperatively to Shut Down Alleged Investment Fraud
- Link to YouTube video described in SEC complaint