The Securities and Exchange Commission brought this action in District Court to restrain respondents from further violations of §§ 5(a) and 17(a)(2) and (3) of the Securities Act of 1933. The District Court denied relief and the Circuit Court of Appeals affirmed upon a construction of the statute which excludes from its operation all trading in oil and gas leases, 133 F.2d 241. As this presents a question important to the administration of the Act we granted certiorari.
Respondents and one Johnson, a defendant against whom a decree was taken by consent, engaged in a campaign to sell assignments of oil leases. The underlying leases, acreage from which was being sold, are not in the record. They required, as appears from the assignments, annual rental in case of delayed drilling of $1 per year. It also seems that these leases were granted by the land owners on an agreement that a test well would be drilled by the lessees. One Anthony blocked up leases on about 4,700 acres of land in McCulloch County, Texas, in consideration of drilling a test well. Defendant Joiner testified that he acquired 3,002 of these acres for 'practically nothing except to drill a well.' Anthony was a driller and agreed to do the drilling which the Joiner Company undertook to finance, expecting to raise most of the funds for this purpose from the resale of small parcels of acreage. The sales campaign was by mail addressed to upwards of 1,000 prospects in widely scattered parts of the country and actual purchasers, about fifty in number, were located in at least eighteen states and the District of Columbia. Leasehold subdivisions offered never exceeded twenty acres and usually covered two and a half to five acres. The prices ranged from $5 to $15 per acre. The largest single purchase shown by the record was $100, and the great majority of purchases amounted to $25 or less. All buyers were given the opportunity to pay these sums in installments, and some did so.
The sales literature nowhere mentioned drilling conditions which the purchaser would meet or costs which he would incur if he attempted to develop his own acreage. On the other hand, it assured the prospect that the Joiner Company was engaged in and would complete the drilling of a test well so located as to test the oil-producing possibilities of the offered leaseholds. The leases were offered on these terms: 'You may have ten acres around one or both wells at $5 per acre cash payable by August 1st, 1941 and $5 per acre additional payable November 1st, 1941 or thirty days after both wells are completed.' Other language in the advertising literature emphasized the character of the purchase as an investment and as a participation in an enterprise.
The trial court made findings of what amounted to fraud, and the Circuit Court of Appeals approved, 133 F.2d 241, 244, saying, 'the evidence would justify stronger findings of fraud.' However, both courts refused injunction because as the Court of Appeals stated it could 'find simply sales and assignments of legal and legitimate oil and gas leases i.e., sales of interests in land.' It was thought that these assignments could not be proved to be 'securities' or 'investment contracts' under § 2(1) of the Act.
Undisputed facts seem to us however to establish the conclusion that defendants were not as a practical matter offering naked leasehold rights. Had the offer mailed by defendants omitted the economic inducements of the proposed and promised exploration well it would have been a quite different proposition. Purchasers then would have been left to their own devices for realizing upon their rights. They would have anticipated waiting an indefinite time paying delayed drilling rental meanwhile until some chance exploration proved or disproved the productivity of their acres. Their alternative would have been to test their own leases at a cost of $5,000 or more per well.