Legal Question in Securities Law in New York

Contract Sale vs. Futures Contract

Capital Biofuel will launch an effort to fund a $10 million waste-to-fuel biodiesel plant in Schenectady County, NY. The company is selling a limited amount of �production shares� which entitle the owner to purchase a percentage of the plant�s biodiesel at a predetermined contract rate. This deal allows business and industry to hedge against rising fuel prices while recycling hundreds of thousands of tons of organic waste into clean-burning, carbon-neutral biodiesel fuel.

A one million dollar contract with Capital Biofuel allows the owner of the production shares to purchase up to 260,000 gallons (10% of plant production) of fuel a year for the next ten years at a guaranteed rate of $2.40/gallon. If diesel fuel prices return to the $5 mark the shares owner would save enough money to equal a return rate of nearly 100% per year.

Biodiesel made from waste organic materials like restaurant grease, trap grease, restaurant table scraps, waste milk and cheese, slaughterhouse scraps, deli scraps, and recalled and spoiled foods, helps reduce landfill pollution and helps establish US energy independence.

Can this be considered a business contract and not a true ''futures'' contract?


Asked on 6/21/09, 4:28 pm

1 Answer from Attorneys
Lawrence R. Gelber Lawrence R. Gelber, Attorney at Law

Re: Contract Sale vs. Futures Contract

The test for whether a particular scheme is an investment contract was established by the Supreme Court in SEC v. W. J. Howey Co., 328 U.S. 293 (1946): �whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.�

The courts have consistently viewed the definition broadly. �Congress� purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.� Reves v. Ernst & Young, 494 U.S. 56, 61 (1990).

According to you CB is looking to raise $10 million by selling "priduction shares" entitling the owner to lock in a price of $2.40 per gallon for ten years. You would have to sit down with an experienced transactional securities lawyer, and provide a lot of detailed information, but I do not think you can avoid registration unless there are some factors you do not disclose here. Good luck.

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Answered on 6/21/09, 5:25 pm


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