Can an ATM Machine Be a Security?

Nationwide Automated Systems offers turnkey ATM solutions. A turnkey ATM program addresses the need for ATM service, repair, system monitoring, and cash replenishment. Typically the ATM provide will split some of the fee income with the property owner where the ATM is located rather than pay a fixed rent.

To raise capital Nationwide create a sale-leaseback with third party investors. The investor buys the machine from Nationwide, then leases it back to Nationwide for ten years in return for rent. The rent is payable as $0.50 per approved transaction.

The Securities and Exchange Commission claims that Nationwide did not actually own the machines is was selling and was generating very little revenue from ATM transactions. The SEC is accusing Nationwide of using new investor investments to pay old investors’ guaranteed returns. The SEC slapped the Ponzi label on Nationwide.

According to the SEC complaint, there was fraud. Nationwide had entered into more than 31,000 ATM sale-leaseback transactions. The SEC investigator only found records of Nationwide owning a few hundred. The SEC also found records of Nationwide selling the sale ATM machine to multiple investors.

Even if there is fraud, the Securities and Exchange Commission can only get involved if there are securities. The SEC needs to prove that the sale-leaseback arrangement was essentially an investment contract. That leads back to some derivation of the Howey case to determine if there is an investment contract, and look at whether there is

1. an investment of money,
2. a common enterprise,
3. a reasonable expectation of profits, and
4. a reliance on the entrepreneurial or managerial efforts of others.

The SEC latched onto a non-interference provision in the leaseback. The ATM owners are prohibited from interfering with operations of the ATM or contacting the locations where ATM is located. That provision is to keep busybodies from showing up at the ATM location and making a nuisance of themselves.That didn’t prevent one suspicious investor from calling the location where her ATM was located, only to have the hotel manager tell her there was no ATM as the hotel.

For a legitimate arrangement that non-interference provision is a perfectly valid provision. The SEC is interpreting it as part of the fraud.

I think this case will hinge on the provisions in the ATM lease. If the investor has some right to end the lease and do something else with the machine, then this is a real estate transaction and not a securities transaction. That means the SEC is out of the picture and the California authorities would need to step in.

The big sign of fraud is the guaranteed return. No investment should have a guaranteed return of 20% per year over 10 years.

The other sign is the cost of the machine. You can buy a basic ATM machine for $2,000. Nationwide is getting a big markup on the sale part of the sale-leaseback.

Nationwide ran into trouble in August when it ran out of cash and bounced checks to investors.

According to the SEC complaint, from August 20 to September 8, 2014 Nationwide deposited almost $4 million into its bank account. Only $52,463 was from ATM transaction revenue. During that same time frame, Nationwide paid over $2 million in “guaranteed” lease payments to existing investors.

I’m impressed with how quickly the SEC brought this case one the checks starting bouncing.

Sources:

• SEC Shuts Down $123 Million Atm Ponzi Scheme in California
• SEC Complaint against Nationwide Automated Systems, Joel Gillis and Edward Wishner