The sole issue in this case is whether the sale of a unit in a partnership constituted the sale of a security within the meaning of the Arkansas Securities Act. We hold that the transaction constituted the sale of a security.
One of the appellees, Glenn R. Schultz, wanted to purchase an investment banking firm. His extensive financial background included a bachelor’s degree from Harvard University with majors in economics and banking, a law degree from Chicago Kent College of Law, experience with R. Roland, a New York Stock Exchange firm, and positions as head of the bond operation for Continental National Bank of Chicago for 10 years, and Senior Vice-President in charge of the bond department of Stephens, Inc. of Little Rock for 10 years. In 1981, he approached the other appellee, J.A. McEntire, III, a Little Rock banker, about raising the money to purchase an investment banking firm. McEntire apparently thought Schultz’s idea was a sound one as he said he knew some medical doctors who were potential investors. A number of doctors, including appellant Robert Casali, were contacted. Ultimately, eight doctors, an art dealer, and appellees contributed $1,175,000.00 into a partnership which was to purchase an investment banking house. They entered into an agreement captioned, “KGS Partners Partnership Agreement.” The stated purpose of the agreement was to own the controlling interest in investment banking houses and to own other real and personal property. The partnership purchased all of the stock of a New York investment banking firm, Park, Ryan & Co. and also a minority of the outstanding stock in a real estate investment company, Greenbelt Properties. The partnership had a later offering of units and appellant Casali invested more money. All together, this second solicitation raised an additional $875,000.00.
Ultimately, Park, Ryan & Co. went into bankruptcy and the partnership was liquidated. Appellant Casali filed this action alleging that the sale of the partnership units amounted to the sale of securities and that appellees Schultz and McEntire had neither registered nor asked for exemption of the securities, and therefore, the transaction must be rescinded. See Ark. Stat. Ann. § 67-1256(a) (Repl. 1980), and Graham v. Kane, 264 Ark. 949, 576 S.W.2d 711 (1979). The trial court did not make a finding of fact, but ruled that, as a matter of law, the transaction was not a security. We reverse.
The only business of the partnership was a passive investment in the corporate stocks of Park, Ryan & Co. and Greenbelt Properties. As a practical matter, the partners had no business to run since all they could do was vote the common stock of Park, Ryan & Co., and they could not even vote to sell that stock without appellees’ consent since the partnership agreement provided that it took unanimous agreement of all partners to sell any of the assets of the partnership.
Appellant and the other investors did not have any control over the operations of Park, Ryan & Co. Appellee Schultz’s testimony on that issue is fairly abstracted as follows:
The investors did not have the right to hire employees of Park Ryan. The investors did not have the right to fire the employees of Park Ryan. The investors did not have the right to trade securities for Park Ryan. The investors did not have the authority to buy securities for Park Ryan. The investors did not have the authority to sell securities for Park Ryan. The investors did not have the authority to set salaries for Park Ryan. The investors did not have the authority to mortgage property of Park Ryan. The investors did not have the authority to open bank accounts. The investors did not have the authority to sign checks. The investors did not have the right to incur any debts. The investors did not have any rights to sell any assets. The investors did not have the individual right to say how the stock of Park Ryan would be voted. The only thing that they had a right to do was to vote the partnership interest.
Appellee Schultz alone among the investors had the knowledge, experience, and expertise necessary to operate an investment banking house. In fact, appellant Casali did not have any training in business or management and had never traded in securities. His only other investment was in an 80 acre farm.
The term “security” as defined in Ark. Stat. Ann. § 67-1247(1) (Repl. 1980) includes “investment contracts” and “certificate of interest or participation in any profit-sharing agreement.” In Schultz v. Rector-Phillips-Morse, 261 Ark. 769, 552 S.W.2d 4 (1977), we decided to adopt a flexible concept for the term “security” since the act is remedial and should be liberally construed to afford protection to the public. Further, the legislative intent was that, regardless of the label on a document, the underlying economic substance of a security is an arrangement where the investor is a mere passive contributor of risk capital to a venture in which he has no direct or managerial control. See Bell, Real Estate and Unconventional Securities Concepts Under The Arkansas Securities Act, 3 UALR L.J. 75 (1980).
The mere fact that an investment takes the form of a general partnership does not insulate it from the reach of the Arkansas Securities Act. In construing the Federal Securities Act of 1933, which is similar to the Arkansas Act, the Fifth Circuit Court of Appeals has written:
A general partnership or joint venture interest can be designated a security if the investor can establish, for example, that (1) an agreement among the parties leaves so little power in the hands of the partner or venturer that the arrangement in fact distributes power as would a limited partnership; or (2) the partner or venturer is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers; or (3) the partner or venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers.
Williamson v. Tucker, 645 F.2d 404, 424 (1981).
Here, the first of the above criteria was clearly established by the investor, appellant Casali. Appellant established that appellee Schultz, by his veto power, could assure that the general partnership would always keep its investment in the investment banking house, and, at the same time, he had absolute control over the investment banking operation. Thus, appellant, in economic reality, was merely a passive contributor of risk capital to appellees’ enterprise. Appellant had no control over the risks taken with his investment. “This subjection of the investor’s money to risks of an enterprise over which he exercises no managerial control is the basic economic reality of a security transaction. . .” State of Hawaii v. Hawaii Market Center, Inc., 52 Hawaii 642, 485 P.2d 105 (1971). The transaction in the case at bar constituted a security transaction.
Reversed.
Hickman, Hays, and Glaze, JJ., dissent.