Company Name: Gainesway Farms, Inc. and John R. Gaines
Public Availability Date: 08-18-1977
[INQUIRY LETTER]CRAVATH, SWAINE & MOORE ONE CHASE MANHATTAN PLAZA NEW YORK, N.Y. 10005 June 15, 1977
June 15, 1977 John R. Gaines and Gainesway Farm, Inc. Dear Sirs: We are counsel to John R. Gaines and Gainesway Farm, Inc. ("Gainesway"), a
Kentucky corporation of which Mr. Gaines is the chief executive officer and sole
shareholder. Mr. Gaines and Gainesway conduct their business activities at
Gainesway Farm in Lexington, Kentucky, where they are engaged in various aspects
of caring for and breeding thoroughbred horses owned by Mr. Gaines, Gainesway
and third parties. During the past decade the demand for, and cost of, thoroughbred stallions with
good bloodlines has greatly increased but the supply of such stallions has
remained relatively constant. This, combined with the fact that most stallions
are capable of breeding to a fairly large number of mares in a single breeding
season, makes it both undesirable and economically impracticable for a breeder
to purchase a stallion for its sole use both because of the large capital
investment involved and because a stallion will often provide greater breeding
capacity than a breeder either wants or can use. In addition, the relative
scarcity of single season nominations (the right to breed one mare to a
particular stallion in a given breeding season) for highly desirable stallions
has made spot purchases on an annual basis an uncertain source of supply.
Therefore, as is the case with certain farmers who jointly purchase combines and
other heavy machinery, many thoroughbred breeders now purchase an interest in a
stallion which gives them the right to breed mares to that stallion for the life
of the stallion rather than purchase the entire stallion itself. Mr. Gaines is presently in the process of negotiating with regard to a stallion
which is to stand at Gainesway and the interests in which will be sold by its
owner (the "original owner") at the time of the stallion's retirement to stud.
The purchases of interests in such stallion will be made by breeders so as to
provide themselves with a commodity (the right to breed a mare to a particular
stallion) for use in their respective businesses. There will be no understanding
in connection with such purchases for any pooling of any income from the
stallion or for sharing of any other gain or risk of loss with regard to the
stallion. The nature of the ownership in the stallion will be similar to a
tenancy in common and each breeder who purchases an interest in the stallion (a
"breeder-owner") will have complete dominion over the use of the nominations
relating to such interest and complete dominion and title to any offspring
resulting from breeding its mare to the stallion. Any of the interests in the
stallion (a total of 40 are involved in the proposed transaction) which are not
purchased by a breeder-owner will be retained by the original owner. The original owner and the breeder-owners will agree that (i) the costs of
maintaining the stallion will be paid pro-rata by each of the owners in
proportion to the number of nominations each is entitled to use in a normal
breeding season, (ii) a final determination of fertility will be made after the
end of the first breeding season and, to the extent that the stallion does not
achieve an agreed-upon fertility percentage, a breeder-owner may rescind the
transaction, (iii) the stallion will stand at Gainesway Farm with either Mr.
Gaines or Gainesway acting as agent for the owners in performing certain
custodial functions, but the stallion may be removed to another location and the
custodian may be changed upon the vote of an agreed-upon percentage of the
owners; (iv) the sole compensation to be paid to the custodian of the stallion
will be the right to use an agreed-upon number of nominations in each breeding
season (but only after each owner has received the nominations to which it is
entitled) and a per diem reimbursement for boarding the stallion (which in fact
will probably be less than the actual costs incurred by the custodian for such
purpose), (v) if the stallion is able to breed to additional mares after it has
satisfied the rights of the owners and the custodian to nominations, the excess
nominations will be given to certain of the breeder-owners as a result of a
drawing by lot from among the group (i.e., there will not be any pooling of
excess nominations), (vi) each owner will have an insurable interest in the
stallion and it is anticipated that most owners individually (although not
necessarily all) will insure their respective interests, (vii) an owner may sell
its fractional interest in the stallion only after extending a right of first
refusal to the other owners and (viii) an owner may sell any nomination it does
not in fact use to another breeder which need not be a breeder-owner. Based upon the facts summarized above, and on the assurance that the interests
and related breeding rights will not be sold to any breeder-owner with any
emphasis that it will earn a profit through the entrepreneurial or managerial
efforts of others, it is respectfully requested that the Division of Corporation
Finance concur in our opinion that the transaction described above does not
involve "securities" within the scope of Section 2(1) of the Securities Act of
1933 (the "Securities Act") or Section 3(a)(10) of the Securities Exchange Act
of 1934 ("Exchange Act") and that the staff state that it will not recommend any
enforcement action to the Commission if the proposed transaction and other
transactions like it are effected without compliance with the registration
provisions of Section 5 of the Securities Act and Section 15 of the Exchange
Act. In our view, the granting of the requested no-action letter is totally
consistent with, and indeed is confirmatory of, existing judicial authority on
this subject since this transaction presents the very situation which the United
States Supreme Court addressed when it stated that "when a purchaser is
motivated by a desire to use or consume the item purchased-- `to occupy the land
or develop it themselves', as the Howey Court put it,
328 U.S., at 300--the
securities laws do not apply". United States Housing Foundation, Inc. v. Forman,
421 U.S. 837, 852-3 (1975). If any further information is desired in connection with this matter, please
communicate with the undersigned. Very truly yours, David L. Schwartz Securities and Exchange Commission,
Division of Corporation Finance,
500 North Capitol Street, N.W.,
Washington, D.C. 20549 VV O [STAFF REPLY LETTER]JUL 18 1977 David L. Schwartz, Esquire
Cravath, Swaine & Moore
One Chase Manhattan Plaza
New York, NY 10005 Re: John R. Gaines and Gainesway Farm, Inc. Dear Sir: This is in response to your letter of June 15, 1977, regarding the sale of
fractional interests in a stallion without compliance with the registration
requirements of the Securities Act of 1933 (the "Act"). The material facts are as follows. Mr. Gaines is presently negotiating regarding
the interests in a stallion which interests will be sold at the time of the
stallion's retirement to stud. Breeders will purchase interests in the stallion
as a "commodity" (the right to breed a mare to a particular stallion) for use in
their businesses. Each breeder who purchases an interest will have complete
dominion and title with respect to any offspring. There will be no understanding
in connection with such purchases for any pooling of any income or for sharing
any other gain or risk of loss. Any of the interests which are not purchased
will be retained by the original owner. The original owner and the breeder-owners will agree that: 1. The costs will be paid pro-rata in proportion to the number of nominations
each is entitled to use. 2. If, at the end of the first breeding season, the agreed upon fertility is not
achieved, a breeder-owner may rescind the transaction. 3. The stallion will stand at Gainesway Farm with either Mr. Gaines or Gainesway
acting as agent for the owners in performing custodial functions, but the
stallion may be moved and the custodian changed upon vote of an agreed-upon
percentage of the owners. 4. The compensation to the agent will be the right to use an agreed-upon number
of nominations each breeding season. 5. Excess nominations will be given to certain of the breeder-owners determined
through a drawing by lot. 6. Each owner will have an insurable interest in the stallion. 7. An owner may sell its fractional interest only after extending a right of
first refusal to the other owners. 8. An owner may sell any nomination it does not use to another breeder which
need not be a breeder-owner. It is your opinion that the transaction does not involve "securities" within the
scope of Section 2(1) of the Act or of Section 3(a)(10) of the Securities
Exchange Act of 1934. It is your view that the transaction is consistent with
the statement of the Court in United States Housing Foundation, Inc. v. Forman,
421 U.S. 837, 852-3(1975) that "when a purchaser is motivated by a desire to use
or consume the item purchased - `to occupy the land or develop it themselves,'
as the Howey Court put it (328 U.S., at 300) - the securities laws do not
apply." Based on the facts presented, as set forth more fully in your letter, this
Division will not recommend any enforcement action to the Commission if the
interests are sold as proposed without compliance with the registration
requirements of the Act, in reliance upon your opinion as counsel that
registration is not required. The Division of Market Regulation has advised us
that it would not recommend enforcement action to the Commission if the
interests are sold by persons who are not registered as broker-dealers pursuant
to Section 15(a)(1) of the Securities Exchange Act of 1934. Because this opinion is based upon representations made to the Division in your
letter, it should be noted that any different facts or conditions might require
a different conclusion. Further, this letter only expresses the Division's
position on enforcement action and does not purport to express any legal
conclusions on the questions presented. Sincerely, Consuela M. Washington
Attorney Adviser
|
