Ivan Landreth and his sons owned all of the stock in a lumber business they operated in Tonasket, Washington. The owners offered the stock for sale. During that time a fire severely damaged the business, but the owners made assurances of rebuilding and modernization. The stock was sold to Dennis and Bolten, and a new organization, Landreth Timber Company, was formed with the senior Landreth remaining as a consultant on the side. The new firm was unsuccessful and was sold at a loss. The Landreth Timber Company then filed suit against Ivan Landreth and his sons seeking rescission of the first sale, alleging, among other arguments, that Landreth and sons had widely offered and then sold their stock without registering it as required by the Securities Act of 1933. The district court acknowledged that stocks fit within the definition of a security, and that the stock in question “possessed all of the characteristics of conventional stock.” However, it held that the federal securities laws do not apply to the sale of 100 percent of the stock of a closely held corporation. Here the district court found that the purchasers had not entered into the sale with the expectation of earnings secured via the labor of others. Managerial control resided with the purchasers. Thus, the sale was a commercial venture rather than a typical investment. The Court of Appeals affirmed, and the case reached the Supreme Court. Decide.
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