St. Mary's Law Journal


The term “association” ordinarily suggests a collective of people bound together in pursuit of a particular purpose. The purpose of many associations is to realize financial gain through investing members’ money under circumstances that may amount to the sale of a security by the association. There are various types of associations that sell club memberships. These transactions lie either within or without the scope of federal and state securities acts. In examining the substance of membership in an association, courts have identified the elements that determine whether a transaction is a security. The elements include the investment of a member’s contribution to finance a speculative venture for the specific purpose of securing future profits solely from a third party or promoter’s efforts. Absent these elements, courts have identified circumstances in which membership in an association does not constitute a security under federal and state law. There are a few instances where membership in an association does warrant securities regulation; for example, if membership includes a significant level of joint control over the managerial decisions of the enterprise. Courts have held that the sale of a membership will not constitute a security unless the membership agreement entitles the member to share in the profits or assets of the association. Prior cases indicate a few instances where the membership interest in question denied the member a right to share in either the income or assets of the association, such as memberships entered into for non-profit purposes. Several cases have departed from the “profit motive criterion.”


St. Mary's University School of Law