When should a rare coin be considered an investment?

[CameoCC]

In the November 11th, 2003 issue of Numismatic News (page 38), David L. Ganz writes a interesting article about when does a coin or coins fall under the Federal Securities Act of 1933 and the Securities and Exchange Act of 1934. He states that several legal actions have occurred, “arguing that they should have registered them as a regulated security”.

 

He sites several cases and the results are mostly against those who do not register rare coins as in investment. The penalties are substantial, “since it allows for a contract to be rescinded long after the event in question – or criminal, which means that the seller who has failed to register can actually find a prosecutor seeking to impose a jail sentence for the “crime” of selling unlicensed, unregistered rare coins”.

 

I think that bottom line is should one tell people that a rare coin is an investment or, as I think, the rare coin is a collectable and one should buy it for the love of having the coin and not as a investment.

 

What are you thoughts?

 

Todd

 

[jtryka]

The is an interesting question, and working in the industry (that is the securities industry, not the coin industry), I may have some insights. Coins themselves may be considered investments, but they are not covered under the 33 or 34 Acts, just like many other investments (land, minerals, real estate, cars, etc.) because they are not securities. The 1933 Act covers the issue and sale of securities in the primary market (i.e. IPOs etc.), while the 1934 Act covers secondary trading (i.e. brokers, exchanges, etc.), but both acts apply only to Securities, which is defined by section 2(a)(1) which states:

 

The term "security" means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

 

So basically, a coin itself does not meet the definition of a security, and as a result would not be covered under the act. There is a lot of early case law as well that would confirm this (though I don't have my casebook handy). Now, under certain circumstances, coins can be "securitized" meaning that they may be transacted or organized such that the trading of them would fall under the act. Let me give an example. Let's say I sell some Morgan dollars to you, in this case, I did not sell you a security, but instead sold you coins. Instead, let's say I offer you a program whereby you pay me an amount of money which will be pooled with others' funds to buy a group of Morgan dollars, and your share would be proportional to the amount you invest (to make it easy, say 10 people each invest $100, so your investment would be 10% of the group of Morgans we buy). Now we've crossed the line. I have not sold you coins, I have sold you an interest in participation in a fund that invests in Morgan dollars, which in this case is an unregistered security, similar to a mutual fund. The fact that it is unregistered, does not make it illegal per se, since I may sell an unregistered security pursuant to an exemption from registration, such as only selling to accredited investors (these would be sophisticated investors with adequate investing experience, income and net worth) under Section 4(6). In that case, I must clearly label the interest as an unregistered security, which the buyer may only sell pursuant to an exemption from registration. This is where there is usually trouble if there is going to be trouble. In addition, there are probably other examples more complex than the one I mentioned, but those would have to be examined on a case by case basis.

 

I know this is probably more information and detail than you wanted, but the bottom line is that a coin by itself is not a security and thus not covered under either act. If they were, then banks would have to file registration statements everytime they made change for a dollar, and the securities markets would grind to a halt pretty quickly. Please also keep in mind that I am not a lawyer, and the foregoing should not be construed as legal or investment advice. Please consult your own attorney or investment advisor to discuss your own legal and investment concerns.

[CameoCC]

I can tell you that after reading the article, it gave me pause. Could I be held liable for a coin I sell?

 

The cases sited are from New York and Mr. Ganz states, “ Neither the 1933 nor the 1934 act define the elements of an “investment contract,” so courts did it for them. In an early case, SEC v. C.M. Joiner Leasing Corp. (320 U.S. 344 (1943)), the Supreme Court stated that the Securities Act, in determining the existence of a security, is to be constructed broadly”.

 

I suppose that means that anyone could define a coin transaction as falling under the Act.

 

I do not know.

 

Todd

 

[jtryka]

Ok, putting aside the insanity of the activist judiciary, a coin itself is not a security, and even if some crack-smoking judge decided a coin could be a security, it would most definitely be a security exempt from registration under section 3(a)(2) since it is issued by the United States government:

 

Section 3 -- Classes of Securities under this Title

 

a. Exempted securities

 

Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities:

 

2. [excerpt] Any security issued or guaranteed by the United States or any territory thereof, or by the District of Columbia, or by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of one or more States or territories, or by any person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing; or any security issued or guaranteed by any bank; or any security issued by or representing an interest in or a direct obligation of a Federal Reserve bank;

 

So again, I would argue that a coin by itself does not meet the definition of a security, but even if somehow you could construe it to be a security it would be exempt from the provisions of the act since it was issued by the US Government.

 

Second, if you were to combine a coin with something else, like a pooled investment, or guaranteed repurchase contract or other such thing that could be argued as a securitization of a coin, you could argue that it is exempt as long as the combined "security" has a maturity of less than 270 days, thus making it exempt from registration under section 3(a)(3) which states:

 

Any note, draft, bill of exchange, or banker's acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited;

 

So even if a shyster lawyer argued that the coin plus your 30-day money back guarantee constituted an "investment contract," you could argue that it is actually a bill of exchange with a maturity less than 270 days and thus exempt from the Act. Again, the only real problem I see is those larger companies that offer coin investment funds where multiple parties pool funds to buy coins and take a proportional interest therein. Or perhaps coins with guaranteed repurchase agreements, or transactions for future deliver (which would mimic a futures contract). I have not looked up either of those cases, but I can only imagine they were not simply a dealer selling a coin to a customer. But just selling a coin or coins by themselves, that in my mind would be insane to rule as an investment contract. Because if it is, then so are the cars we buy and the homes we own, and virtually any other goods or services traded in our economy. And if that's the case, I am going to sue Starbuck's for selling me an unregistered security next time I buy a cup of coffee, and Microsoft for selling me an unregistered security for Windows software, that could make me rich!

 

 

[jtryka]

Looking into the case law (it's a slow day in the market, so I have time), the most common case for the definition of an investment contract is the Supreme Court's decision in SEC v. W.J. Howey Co. (Howey) which came after SEC v. C.M. Joiner Leasing Corp. In this decision, the court was fairly specific in its definition of an investment contract, stating that an investment contract is, "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party..."

 

In SEC v. C.M. Joiner Leasing Corp., the defendant sold leaseholds for oil and gas which would then be drilled by the offeror for the buyer. In that ruling, the Supreme Court stated, "Had the offer mailed by defendants omitted the economic inducements of the proposed and promised exploration well, it would have been a quite different proposition." It was the combination of the oil and gas lease in a common enterprise, with the efforts of the third party that made the leaseholds into investment contracts.

 

Lower courts have subsequently expanded the Howey definition to include the expectation of profits from the efforts of others, rather than solely from the efforts of others, and the Supreme Court has been silent on whether they side more with one or the other. In any case, if an instrument does not satisfy the Howey test, it is not considered by the courts to be an investment contract. In fact, in subsequent cases such as International Brotherhood of Teamsters v. Daniel, United Housing Foundation, Inc. v. Forman, and Marine Bank v. Weaver, the court has basicially ruled that if any one of the components of the Howey test is missing, there is not investment contract. In the first case, there was no investment of money, in the second, there was no expectation of profits, and in the final case, the terms of the agreement amounted to a private commercial transaction. So the final jusdgement has to be whether the coin transactions you are involved in meet the Howey test. If all the requirements are not met, it is not an investment contract.

 

Edited to add the source (don't want to plagiarize now!): this came from an article I found on-line from the American Bar Association ( Link )

[CameoCC]

WOW - Cool - jtryka - Your repsonse have helped alot.

 

Here is a response from the other side of the street (Lawman - He is a lawyer in CA):

 

Don't market coins or anything else as an investment. Don't prepare charts and graphs showing expected performance. Just sell coins as collectibles and you should be OK under the securities laws. The problems came during booms in 79-80 and 89-90 (not sure of the dates on the second one) when the Wallstreeters got involved and were actively marketing investment portfolios. I defended a case in the early 80's where an attorney put his pension heavily into a 'rare coin portfolio' at the height of the 79-80 boom, then the crash came, and he sued everyone in sight in an almost 100-page complaint filed in US District Court in LA, alleging every kind of securities violation under the sun. It wasn't a pretty sight.

 

Todd

[jtryka]

WOW - Cool - jtryka - Your repsonse have helped alot.

 

Here is a response from the other side of the street (Lawman - He is a lawyer in CA):

 

Don't market coins or anything else as an investment. Don't prepare charts and graphs showing expected performance. Just sell coins as collectibles and you should be OK under the securities laws. The problems came during booms in 79-80 and 89-90 (not sure of the dates on the second one) when the Wallstreeters got involved and were actively marketing investment portfolios. I defended a case in the early 80's where an attorney put his pension heavily into a 'rare coin portfolio' at the height of the 79-80 boom, then the crash came, and he sued everyone in sight in an almost 100-page complaint filed in US District Court in LA, alleging every kind of securities violation under the sun. It wasn't a pretty sight.

 

Todd

 

Wow, if I had known being a lawyer was as easy as that response, I would have stayed the extra year for my JD when I got my MBA!

[James_OldeTowne]

I think ANY coin, rare or not, that you collect, should be considered an investment. For me, it takes a lot of time to pick out just that "right" coin, and if it's for my personal collection, I often pay too much.... . The point is, what everyone "invests" could be different, be it time, money, or space to store the collection. So for me, I'd say pretty much anything for my collection is an "investment".

 

With regard to your specifically legal question, we are always extremely careful never to use the word "investment" when we sell a coin to someone, if you're just talking "dollars and cents". Coins should NOT be viewed or advertised as a financial investment in my opinion, if you are a dealer. I think of them as "art".

 

James

[SilverEagleCoins]

A variant of the initial investment question: How long are you willing to wait to decide if your coins goes up? I know everyone is looking for that undergrade but if you bought a toned morgan or something, how long do you want to realistically wait before you churn it.

[jtryka]

A variant of the initial investment question: How long are you willing to wait to decide if your coins goes up? I know everyone is looking for that undergrade but if you bought a toned morgan or something, how long do you want to realistically wait before you churn it.

 

If it's a coin that's made it to my permanent collection, then I would wait until I found a better one, then sell it. I am really a collector, so I don't pay a whole lot of attention to the daily/monthly/yearly moves in the prices of my collection (though sometimes I am a bit surprised when browsing auctions and see the prices). I generally buy coins because I want to keep them, not churn them.