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Securities and Exchange Commission v. Koscot Interplanetary, Inc.

497 F.2d 473 (1974)

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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)

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Facts

Koscot Interplanetary, Inc. (Koscot) (defendant) operated a pyramid scheme. At the bottom, beauty advisors sold cosmetics. Beauty advisors could pay $1,000 to become supervisors and $5,000 to become distributors, receiving the cosmetics at greater discount and selling them to supervisors. Scheme participants who recruited others to join the scheme and move up the ranks received financial compensation. Consequently, many distributors were attracted to the position because of the money to be earned by high-pressure recruiting. Recruiters solicited prospects to attend opportunity meetings, but recruitment guidelines instructed not to provide much information beforehand. Further, the meetings involved a script preprepared by Koscot. The Securities and Exchange Commission (SEC) (plaintiff) sued Koscot, alleging, among other things, that the recruitment part of Koscot’s business qualified as an investment contract, making it a security. The SEC then argued that Koscot failed to comply with the registration requirement of the Securities Act of 1933 and violated the antifraud provisions of the Securities Exchange Act of 1934. Koscot disagreed, arguing that its scheme did not involve the sale of a security and was not subject to the acts. The district court held in Koscot’s favor. The SEC appealed.

Rule of Law

Issue

Holding and Reasoning (Gewin, J.)

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