The Basics of an Investment Contract 

An investment contract defines key investment terms, provide essential legal protections for shareholders, and offer recourse in case of disputes. The offering and sale of an investment contract must comply with federal registration, disclosure, and anti-fraud rules to protect the investing public.

If you have lost money through a fraudulent investment scheme, do not hesitate to contact the securities fraud class action attorneys at Silver Law Group to learn about your legal rights and options. We only charge you if we win or settle your case.

What Are The Basics Of An Investment Contract?

Fundamentally, an investment contract is a legally binding agreement between you and a company—or other entity—that outlines the exchange of funds for future returns. To be legally defined as an investment contract, the document must meet the four criteria of the Howey test, which determines whether a transaction is an investment contract, including:

• An investment of money: You have contributed money or other assets
• A common enterprise: Your funds are combined with those of other investors, and your return relies on the success of the overall venture
• An expectation of profits: You enter the transaction with a reasonable anticipation of a financial return
• Profits derived from the efforts of others: The success of your investment depends predominantly on the managerial or entrepreneurial efforts of a third party, not the investor

Examples of transactions that typically meet the Howey Test criteria include traditional stocks and bonds, real estate limited partnerships, and certain multilevel marketing schemes. The Howey test is flexible and often used by the Securities and Exchange Commission to evaluate modern financial instruments, including cryptocurrencies and initial coin offerings.

Any assets that meet the Howey Test criteria are considered securities and are subject to federal securities regulations, including registration requirements.

Common Types Of Securities Fraud

Once your transaction is defined as an investment contract, fraud occurs when the perpetrator engages in intentional deception fundamentally related to its sale or purchase. A securities fraud claim related to an investment contract generally requires proving the following elements:

• Material misstatement or omission: The defendant made a false or misleading statement, or omitted a fact that a reasonable investor would deem important
• Scienter: Direct or circumstantial evidence of extreme recklessness and the intent to deceive, manipulate, or defraud
• Purchase or sale of securities: The fraudulent activity was related to the purchase or sale of securities
• Reliance: You relied on false or misleading information when making your investment decision
• Loss causation: You suffered an economic loss as a direct result of the fraudulent misstatement or omission

Fraudulent schemes built on unregistered investment contracts often target investors through Ponzi schemes, where new investor money is used to pay so-called returns to earlier investors, creating the illusion of a profitable venture. The scheme has no legitimate underlying business and is designed to collapse.

Securities fraud also includes Pump-and-Dump schemes, where fraudsters inflate stock prices with false information and then sell their own shares, as well as market manipulation, which encompasses various tactics used to artificially influence the price of a security.

Contact Us Today To Discuss Investment Contracts And Securities Fraud

The basics of an investment contract can provide you with a legal path for financial recovery in the event of fraud. Silver Law Group helps individual and institutional investors recover losses from fraud by pursuing claims in court or mediation.

We handle cases on a contingency fee basis and offer a free consultation to review potential claims, so contact Silver Law Group today.