Securities and Exchange Commission v. Aqua-Sonic Products

Aqua-Sonic Products (Aqua-Sonic) (defendant) sold licenses to distribute its dental products. Licensees had the option to use Ultrasonic (defendant) as their sales agent, which meant Ultrasonic would be responsible for all significant marketing activities. Both Ultrasonic and Aqua-Sonic were owned by the same parent corporation. However, licensees could cancel the Ultrasonic sales-agency relationship, could exercise some control over pricing and other sales terms, and could inspect Ultrasonic’s records. The licenses were marketed to investors looking for tax benefits—not to experienced dental-supply distributors—and licensees were advised that using Ultrasonic would be tax-advantageous. Between May 1 and December 31, 1978, all 50 purchasers of Aqua-Sonic licenses also entered into agency agreements with Ultrasonic. The Securities and Exchange Commission (SEC) (plaintiff) sued Aqua-Sonic, Ultrasonic, and others, alleging that the Aqua-Sonic licenses were investment contracts—and thus securities—within the meaning of the Securities Act of 1933 (securities act) and the Securities Exchange Act of 1934 (exchange act). Aqua-Sonic and Ultrasonic responded that the licenses were not investment contracts because the licensees’ profits did not depend solely on the efforts of others, as the licensees did not have to use Ultrasonic as their agent and they retained certain rights and obligations even if they did use Ultrasonic. The SEC argued that the licenses were investment contracts even if their financial success was not literally solely dependent on the efforts of nonlicensees and that the purportedly optional nature of the Ultrasonic relationship was irrelevant. The district court ruled that the licenses were investment contracts and issued an injunction prohibiting their continued sale. Aqua-Sonic and Ultrasonic appealed.