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Securities and Exchange Commission v. Koscot Interplanetary, Inc.

United States Court of Appeals for the Fifth Circuit
497 F.2d 473 (1974)

Facts

Koscot Interplanetary, Inc. (defendant) operates a scheme in which individuals may pay a certain amount of money in order to have the right to sell cosmetic products at a discount. The greater the amount paid to Koscot, the greater the discount. The individuals are recruited by those investing in Koscot at Opportunity Meetings. The investors read directly from a script provided by Koscot. The Securities and Exchange Commission (plaintiff) brought suit against Koscot, alleging that this scheme constitutes a security, and thus must comply with securities regulations. The district court ruled in favor of Koscot, stating that the third prong of the Howey test, profits originating from others, was not satisfied in this instance because the investors were involved in the recruitment of employees. The SEC appealed to the Fifth Circuit Court of Appeals.

Rule of Law

Issue

Holding and Reasoning (Gewin, J.)

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