     Case: 17-10503   Document: 00515013011        Page: 1   Date Filed: 06/27/2019




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                               United States Court of Appeals
                                                                        Fifth Circuit
                                    No. 17-10503                      FILED
                                                                  June 27, 2019

SECURITIES AND EXCHANGE COMMISSION,                              Lyle W. Cayce
                                                                      Clerk
             Plaintiff - Appellee

v.

ARCTURUS CORPORATION; ASCHERE ENERGY, L.L.C.; LEON ALI
PARVIZIAN, also known as Alex Parvizian; ROBERT J. BALUNAS; R.
THOMAS & CO., L.L.C.; ALFREDO GONZALEZ; AMG ENERGY, L.L.C.,

             Defendants - Appellants




                Appeals from the United States District Court
                     for the Northern District of Texas


Before STEWART, Chief Judge, and DENNIS and WILLETT, Circuit Judges.
CARL E. STEWART, Chief Judge:
      IT IS ORDERED that our prior panel opinion, Securities and Exchange
Commission v. Arcturus Corporation, 912 F.3d 786 (5th Cir. 2019), is
WITHDRAWN and the following opinion is SUBSTITUTED therefor.
      The Defendants—Leon Ali Parvizian, Alfredo Gonzalez, Robert J.
Balunus, Arcturus Corp., Aschere Energy, LLC, R. Thomas & Co., LLC, and
AMG Energy, LLC—sold interests in several oil and gas drilling projects to
investors. They never registered the interests as securities. The SEC called
foul and filed this civil enforcement action. Because the Defendants failed to
register interests in their drilling projects as securities, the SEC alleged that
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                                  No. 17-10503
they violated Sections 10(b) and 15(a) of the Securities Exchange Act
(“Exchange Act”), 15 U.S.C. §§ 78j(b), 78o(a), Rule 10b-5, 17 C.F.R. § 240.10b-
5, and Sections 5(a), 5(c), and 17(a) of the Securities Act (“Securities Act”), 15
U.S.C. §§ 77e(a), 77e(c), 77q(a). After roughly a year and a half of discovery,
both parties filed motions for summary judgment. The district court granted
the SEC’s motion, holding that the oil and gas interests qualified as securities.
The Defendants now appeal. Because the Defendants raised significant issues
of material fact, we reverse the district court’s decision and remand for trial.
     I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
                        A. FACTUAL BACKGROUND
      This case involves seven defendants, three individuals—Leon Ali
Parvizian, Alfredo Gonzalez, and Robert J. Balunus—and four companies—
Arcturus Corp., Aschere Energy, LLC, R. Thomas & Co., LLC, and AMG
Energy, LLC. Parvizian started three of the companies—Arcturus, Aschere,
and AMG.     He was also primarily responsible for running Arcturus and
Aschere.    Parvizian also founded AMG, but passed management on to
Gonzalez, who has served as president since 2010.          Balunus started and
managed R. Thomas.
      The Defendants offered and sold interests in six oil and gas drilling
projects—Hillock, Piwonka, Conlee, Fraley-Nelson, Chips, and Wied Field.
Each project had a managing venturer that supervised and managed the day-
to-day operations. The managing venturer also earned management fees paid
by the project. Together, Arcturus and Aschere were the managing venturers
of all six projects—Arcturus managed four, and Aschere managed two. (We
refer to Arcturus and Aschere, collectively, as the “Managers.”)
      While Arcturus and Aschere managed the drilling projects, R. Thomas
and AMG were primarily responsible for marketing and selling interests in the


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projects. Neither company controlled or operated the drilling projects beyond
marketing, and neither company registered as a broker.
       R. Thomas entered into a consulting agreement with Aschere. Under the
agreement, R. Thomas earned a 12% commission on each new investor it
introduced to the drilling projects. 1 AMG had a similar consulting agreement
with Aschere, under which it offered and sold interests in all six joint ventures
in exchange for $500 per week for each AMG employee and a 12% commission
on each venture unit sold.
                                   1. The Sales Process
       When the Defendants were selling interests in the drilling projects, they
sought investors through a nationwide cold-calling campaign from 2007 to
2011. 2 Potential investors came from a lead list that Parvizian purchased. 3
The Defendants also called previous investors about the drilling projects.
       The record indicates that the full cold-call process involved multiple
conversations and multiple calls. (According to Alfredo Gonzalez, a former
Amerest salesperson, the process “might take 5 phone calls or it might take 15
phone calls.”) In the initial call, the salesperson would give a “short and sweet”


       1 We refer to the joint venturers as “investors.” This is only for convenience and does
not reflect a legal judgment.

       2 The majority of the information about the cold-call process came from SEC
investigative interviews. The SEC took these interviews before filing its lawsuit in 2013.

       3There is little evidence about the lead list in the record, but several individuals made
statements about the lead list in SEC investigative interviews. Robert Balunas, a former
salesperson at Amerest Securities, a company that contacted potential investors for Arcturus,
stated that he had prior knowledge of and relationships with some of the investors his
company sent to Arcturus. He did not know anything about the lead lists used by Parvizian.
He did state, however, that he only made offers to accredited investors.

       According to another person, the list might have included only accredited investors.
He also suggested that salespeople called both new and current clients. Parvizian stated that
AMG Energy may have provided him with the lead list, but he was unsure.

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statement, introducing himself and noting that he works for “a firm involved
in [sic] oil and gas exploration.”          The salesperson would then ask if the
prospective investor had experience in oil and gas investing. If the investor
did, the salesperson would ask if the prospective investor was interested in
information about a potential investment opportunity. If so, the salesperson
would transfer the prospective investor to a “registered broker.” 4 Or if the
salesperson was also a registered broker, then he would continue speaking
with the prospective investor. If the prospective investor expressed further
interest to the broker, the broker would have a receptionist send out
information.
       Initially, Arcturus would send a one-page introduction letter, giving
basic information about the company and ways to seek out additional
information. 5 This letter did not include any other materials. This process
was designed to form a “substantive relationship” with the new client. If the
new client expressed interest after additional calls, then Arcturus would send
out a group of signing documents. The Defendants distributed five primary
signing documents: (1) a Confidential Information Memorandum (“CIM”),
which gave a detailed overview of the drilling project; (2) a copy of the Joint
Venture Agreement (“JVA”), which laid out the contractual rights and duties
of each party; (3) a screening questionnaire, which asked various questions
about the investor’s education, investing history, and experience; (4) a Private



       4Brokers could not communicate with potential investors in any other way. For
example, they did not have access to email.

       5  Brian William Bull, the former chief compliance officer for Amerest Securities,
suggested that existing clients might not receive this introduction letter. It is unclear how
many existing clients Arcturus had. Bull did state, however, that “many” investors “had been
clients for years.” It is unclear whether these investors were clients of Amerest, Arcturus, or
both. But at least some of the eventual investors had been Parvizian’s clients for years.

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Placement Memorandum (“PPM”), which was an advertising brochure for each
drilling project with geological information, pricing, and potential returns; and
(5) a subscription agreement, which served as the investor’s application. After
sending these documents, a broker would make a follow-up call to ensure the
materials arrived and were all in order.
      If the prospective investor decided to invest, then he would fill out
“paperwork that was included” in the materials, including the questionnaire.
Arcturus would review the questionnaire to ensure that (1) the investor was
accredited and (2) the investment was suitable for the particular investor. This
review included looking at the investor’s net worth and employment.
According to Balunas, the Defendants would also check on the potential
investor’s experience with oil and gas investing.
      After reviewing these documents, the Defendants would sometimes call
prospective investors for additional information, though this would happen
less often for “repeat clients.” The Defendants would then request that each
prospective investor reverify their suitability information. Bull also suggested
that they would seek other updates on each investor’s suitability from “time-
to-time.”   If the investor did not qualify as an accredited investor, the
Defendants would reject the investor. 6 Both Bull and Billy Cooper, a former
Arcturus employee, stated that the Defendants would reject non-accredited
investors, but Bull could not remember any specific rejections. Cooper also
believed that some of the projects may have had non-accredited investors.
Parvizian disagreed and maintained that every investor was accredited.




      6  Even before rejecting an investor based on their questionnaire responses, Bull
indicated that they would sometimes reject prospective investors before sending out the
questionnaire if it seemed like the investment would not be suitable.
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                                     2. The Investors
       Spread over the six projects, there were over 340 investors. 7 The record
does not contain much information about these investors. The record only
contains direct evidence about the qualifications of roughly 25 investors,
leaving nearly 315 unaccounted for. But of the 25 investors about whom we
have information, many had experience in the oil and gas field, direct
experience with the Defendants, or both. One investor has prior experience
with Orbit Energy. Another stated that he has “an engineering background”
and “participated in other energy ventures with Escondido and Patriot
Energy.” Another stated that he has “done 83 of these projects over the last
ten years.” Another stated that he has “extensive experience in investing in
domestic energy and often defer[s] to the advice of [his] energy advisors and
petroleum engineers.” Another has “past experience in oil and gas with various
partial investment projects.” Another has “past experience in oil and gas with
Cocoal and British Petroleum.” Another has “previous oil & gas experience
with OG-7 Jay Pisquro.” Another “previously invested in three different oil
drilling and exploration projects.” Another “previously invested in at least
seven different oil and gas drilling, exploration, and/or production projects,”
some of which “were joint ventures which, like Arcturus, required active
participation and voting.”          Another invested in two other drilling joint


       7The number of investors is uncertain. For example, one document, prepared by the
SEC, pegs the number at 380. The Defendants counted 341 investors. The Defendants,
though, counted investors more than once if they invested in more than one joint venture.
For example, if one investor took part in four joint ventures, he was counted four times. See
Another document in the record counts 349 investors. That document, however, lists many
investors more than once.

       The parties also disagree on the number of investors per venture. According to the
Defendants’ count, there were 94 investors in Hillock, 61 in Piwonka, 59 in Conlee, 4 in
Fraley-Nelson, 35 in Chips, and 88 in Wied Field. According to the SEC, there were 108
investors in Hillock, 57 in Piwonka, 71 in Conlee, 4 in Fraley-Nelson, 35 in Chips, and 105 in
Wied Field.
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                                 No. 17-10503
ventures.   And another has “past experience in oil and gas with Choice
Exploration.”
      Besides those with oil and gas experience, at least five other investors
have prior experience with the Defendants. Other investors had more general
business experience. For example, one investor is a senior vice president at
Capitol One and manages an operating budget of $500,000,000. Another has
invested millions in publicly traded stocks and “numerous” joint venture
investments.
      Beyond these investors, the record contained information about five
investors who seemed to lack specialized experience.
      Outside of this direct information about investors, the Defendants made
a few global statements about the investors.        Parvizian stated that every
investor was accredited.    Balunas discussed the investors at length.         He
repeatedly emphasized that the investors were “sophisticated people.”
Balunas stated that many investors “had their CPAs or attorneys call” the
Defendants. And others personally visited the well or spoke with the drilling
operator or onsite drilling engineers. Bull assumed that some investors were
new to oil and gas investment. But Cooper stated that “most of the people [he]
spoke to [had] invested in oil and gas before.”
                            3. The Drilling Projects
      The drilling projects were split into multiple stages.        First, in the
capitalization stage, the Defendants sought investors for each individual
drilling project. According to the signing documents, investors collectively
would pay a fixed price for a “Turnkey Drilling Contract.” The Manager of the
drilling project would then use those funds to purchase a working interest in a
prospect well, which would entitle it to drill, test, and complete the well. The
working interest also entitled the project to a share of the well’s net revenue.


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       After capitalization, the drilling project would begin initial operations.
Initial operations included the drilling and testing of the prospect well. The
Manager of each drilling project was responsible for the initial operations.
Aschere, for example, was responsible for managing the initial operations of
the Conlee well. To complete the initial operations, the Manager would take
the investors’ funds and subcontract with a drilling operator who would drill
and test the well.        The operator for each project was identified in the
corresponding CIM.
       After drilling and testing the well, the Managers would recommend
whether or not to complete the well. 8 The investors would then vote on the
recommendation.        If the investors voted in favor, then they would all be
required to pay a completion assessment, which covered the cost of entering
into a “Turnkey Completion Contract.”               If an investor did not pay the
completion assessment, he abandoned his interest in the well, did not pay any
further assessments, and had no right to any revenue.
       After completion, the investors could elect, at the Manager’s
recommendation, to engage in special operations. Special operations could
include drilling deeper, fracking, or completing additional zones in the well.
These operations were subject to special assessments. The investors could also
choose to engage in additional operations, which were subject to additional
assessments.
                            B. PROCEDURAL HISTORY
       In December 2013, the SEC filed this civil enforcement action, alleging
that the Defendants violated Section 5(a) and (c) of the Securities Act and
Section 17(a) of the Exchange Act. The SEC argued that interests in these


       8 “In simple terms, [completing a well means] the gas well moves from construction to
extraction phases.” JAMES T. O’REILLY, THE LAW OF FRACKING § 6:9 (2018). This process
usually includes placing equipment into the well and drawing out oil or gas.
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drilling projects qualified as securities, and the Defendants tried to avoid
federal securities laws by calling the projects joint ventures and labeling the
investors as partners. The Defendants argued that the projects were joint
ventures because the investors had powers, rights, and management
obligations. Both parties filed motions for summary judgment, and the district
court granted the SEC’s motion.
      The district court held that interests in the drilling projects were sold as
securities pursuant to SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The parties
agreed that only one factor from Howey was in dispute—whether the investors
expected to profit “solely from the efforts of” the Defendants. This factor is
governed by Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), which sets out
three factors for determining whether investors expect to profit solely from
third-party efforts. The drilling interests qualified as securities for three main
reasons, which correspond to the three factors in Williamson. First, the district
court held that the investors had no real power to control the venture. Despite
having some powers in the JVAs, the court held that these powers were illusory
because the investors had no way of contacting each other, and the Defendants
would not provide contact information. Without the ability to communicate,
they could not amass the votes they needed to control the drilling projects.
      Second, the court held that the investors were inexperienced and lacked
expertise in the oil and gas field. The investors lacked experience, according
to the district court, because the Defendants marketed their drilling interests
through a broad cold-calling campaign. The investors were also forced to rely
on the Defendants to acquire all of their information.
      Third, the court held that the investors were reliant on the Defendants.
The Defendants controlled all of the investors’ assets, and a replacement
manager could not access those assets—only the Defendants could.             The
investors also relied on the Defendants for all of their information.
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                                  II. DISCUSSION
      This court reviews a district court’s grant of summary judgment de novo,
using the same legal standard as the district court.                 Turner v. Baylor
Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007). Summary judgment
is appropriate where there is no genuine issue of material fact and the parties
are entitled to judgment as a matter of law. Id. All reasonable inferences must
be drawn in favor of the nonmovant, but “a party cannot defeat summary
judgment with conclusory allegations, unsubstantiated assertions, or only a
scintilla of evidence.” Id. (internal quotation marks omitted).
      Under Section 5 of the Securities Act, it is “unlawful for any person,
directly or indirectly” to use interstate commerce to offer to sell “any security”
unless the person has filed a “registration statement” for the security. 9 15
U.S.C. § 77e(c). The Securities Act broadly defines the term security to include
a long list of financial instruments, including “investment contracts,” the type
of security at issue here. See 15 U.S.C. § 77b(a)(1). While Congress defined
the term “security,” it left it to the courts to define the term “investment
contract.” In Howey, the Supreme Court did exactly that and developed a
“flexible” test for determining whether an investment contract qualifies as a
security:
      [A]n investment contract for purposes of the Securities Act means
      a contract, transaction or scheme whereby a person invests his
      money in a common enterprise and is led to expect profits solely
      from the efforts of the promoter or a third party . . . .
Howey, 328 U.S. at 298–99. Distilled to its elements, an investment contract
qualifies as a security if it meets three requirements: “(1) an investment of
money; (2) in a common enterprise; and (3) on an expectation of profits to be



      9  It is undisputed that the Defendants never filed a registration statement for the
interests in their drilling projects.
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derived solely from the efforts of individuals other than the investor.”
Williamson, 645 F.2d at 417–18 (citing SEC v. Koskot Int’l, Inc., 497 F.2d 473
(5th Cir. 1974)).
       When applying this test, courts should disregard “legal formalisms” and,
instead, focus on the substance of the deal—“the economics of the transaction
under investigation.” Reves v. Ernst & Young, 494 U.S. 56, 61 (1990). Even
though certain contracts might “superficially resemble private commercial
transactions” and lack “the formal attributes of a security,” they still can
qualify as securities. Youmans v. Simon, 791 F.2d 341, 345 (5th Cir. 1986)
       Here, the parties do not contest that the drilling interests met the first
two Howey factors. 10       The primary issue is whether the drilling interests
satisfied the third factor—whether the investors expected to profit “solely from
the efforts of” the Managers.
       When determining whether investors expect to rely “solely on the efforts
of others,” courts construe the term “solely” “in a flexible manner, not in a
literal sense.” Youmans, 791 F.2d at 345. And for good reason. If courts
interpreted “solely” in a literal way, a party could “evade liability” merely by
parceling “out [minor] duties to investors.” Id. at 345–46. To prevent this
possibility, courts find the third Howey factor met if “the efforts made by those
other than the investor are the undeniably significant ones, those essential
managerial efforts which affect the failure or success of the enterprise.”
Williamson, 645 F.2d at 418.              Even though an investor might retain
“substantial theoretical control,” courts look beyond formalities and examine




       10 Gonzalez states, in one sentence, that none of the Howey factors were satisfied, but
his brief is dedicated solely to the third factor. Because he did not provide any support for
his argument, he waived it. United States v. Upton, 91 F.3d 677, 684 n.10 (5th Cir. 1996)
(“[C]laims made without citation to authority or references to the record are considered
abandoned on appeal.”).
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whether investors, in fact, can and do utilize their powers. Affco Invs. 2001,
LLC v. Proskauer Rose, L.L.P., 625 F.3d 185, 190 (5th Cir. 2010).
       Here, the court must apply these general principles to a partnership. 11
Interests in a partnership can satisfy the third Howey factor and qualify as an
“investment contract.” But not all partnerships qualify. For example, partners
in a general partnership can guard “their own interests” with their “inherent
powers” and do not need protection from securities laws—they can “act on
behalf of the partnership”; “bind their partners by their actions”; “dissolve the
partnership”; and “are personally liable for all liabilities of the partnership.”
Youmans, 791 F.2d at 346. General partners are, in short, “entrepreneurs, not
investors.” Id. Accordingly, general partnership interests typically do not
qualify as securities.       Id.   And a litigant trying to prove otherwise must
overcome the “strong presumption” that “a general partnership . . . is not a
security.” Nunez v. Robin, 415 F. App’x 586, 589 (5th Cir. 2011) (per curiam)
(unpublished) (quoting Youmans, 791 F.2d at 346); see also Youmans, 791 F.2d
at 346 (“A party seeking to prove the contrary must bear a heavy burden of
proof.”).
       Limited partners are different.              Unlike general partners, limited
partners lack significant powers—their “liability for the partnership is limited
to the amount of their investment”; “[t]hey cannot ordinarily dissolve the
partnership . . . [or] bind other partners”; and “they have little or no authority
to take an active part in the management of the partnership.” Youmans, 791
F.2d at 346. Without any significant powers, a limited partner is like “a
stockholder in a corporation.” Id. As a result, “limited partnership interests



       11 This court applies the same analysis to partnerships and joint ventures. Youmans,
791 F.2d at 346 n.2 (“Our discussion of partnerships applies with equal force to joint ventures
since this kind of business investment device is the same for purposes of the federal securities
laws.”).
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may be considered a security.” Id. (citing Sibel v. Scott, 725 F.2d 995, 998 (5th
Cir.), cert. denied, 467 U.S. 1242 (1984)).
      While we typically employ a “strong presumption” that “a general
partnership . . . is not a security,” Nunez, 415 F. App’x at 589 (quoting
Youmans, 791 F.2d at 346), we have noted that even general partners can lack
managerial powers. Labeling a partnership as general or limited does not
always reflect what really matters: the division of power among the partners.
While general partners usually have an array of ways to influence the
partnership, partnership documents or other barriers sometimes curtail their
power. Under these circumstances, even a general partnership interest can
qualify as a security.
      To guide courts in applying the third Howey factor to these in-between
situations, this court set forth the three Williamson factors—the primary
source of contention here. These factors flesh out situations where investors
depend on a third-party manager for their investment’s success, and each
factor is sufficient to satisfy the third Howey factor. Under the Williamson
factors, a partner is dependent solely on the efforts of a third-party manager
when:
        (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.




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Williamson, 645 F.2d at 424. 12 Courts, however, are not limited to these three
factors—other factors could “also give rise to such a dependence on the
promoter or manager that the exercise of partnership powers would be
effectively precluded.” Id. at 424 n.15. But regardless of which factor is at
issue, a party can only prove one of the Williamson factors by looking to the
unique facts of the arrangement at issue. Differently put, a party faces a
“factual burden” when proving one of the Williamson factors. Id. at 425.
                      A. THE FIRST WILLIAMSON FACTOR
       The first Williamson factor is whether the drilling projects left the
investors so little power “that the arrangement in fact distributes power as
would a limited partnership.”            Id. at 424.       In determining whether an
arrangement deprives investors of power, courts look to two sources of
evidence. First, courts look to the legal documents setting up the arrangement
to see if investors were given formal powers. See, e.g., id. (looking to the
“partnership agreement” to see if partners were given power). Second, courts
examine how the arrangement functioned in practice, which includes looking
for barriers to investors using their powers. See, e.g., Nunez, 415 F. App’x at
590 (looking to the fact that an investor exercised power over the partnership’s
finances); Long v. Shultz Cattle Co., 881 F.2d 129, 134 (5th Cir. 1989) (crediting
the jury’s conclusion that investors, in practice, followed the manager’s




       12 A number of other circuits have adopted the Williamson factors as a way to analyze
the third Howey factor. See, e.g., SEC v. Shields, 744 F.3d 633, 644 (10th Cir. 2014) (adopting
the Williamson factors); United States v. Leonard, 529 F.3d 83, 90–91 (2d Cir. 2008) (same);
SEC v. Merch. Capital, LLC, 483 F.3d 747, 755–56 (11th Cir. 2007) (same); Stone v. Kirk, 8
F.3d 1079, 1086 (6th Cir. 1993) (same); Koch v. Hankins, 928 F.2d 1471, 1477–81 (9th Cir.
1991) (same); Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc., 840 F.2d 236, 241
(4th Cir. 1988) (same).

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recommendations). How the arrangement functioned is typically the most
important indication of whether investors had power. 13
       Here, this factor turns on six critical disputes—(1) the Managers’ formal
powers as compared to the investors’ formal powers; (2) whether the investors
exercised their formal powers; (3) the voting structure of the drilling projects;
(4) information available to the investors; (5) communication among the
investors; and (6) the number of investors.                 All these factors go towards
determining whether the investors had power to control the drilling projects.
                  1. The Managers’ and Investors’ Formal Powers
       Arcturus and Aschere did possess a significant amount of power. First,
and most significantly, the JVAs make clear that they had the power to control
“the day-to-day Operations” of the drilling projects.                    The JVAs defined
“Operations” broadly as any activity related to acquiring, drilling, testing,
completing, equipping, or otherwise working on the prospect well. The ability
to control the daily “Operations” also came with “full and plenary power” to,
among other things, (1) retain operators to drill and complete wells, (2) conduct


       13 Gonzalez dedicates much of his brief to arguing that the district court erred by
looking to post-investment conduct when it was determining the expectations of the parties
at the time they entered the drilling investment contracts. This argument is unpersuasive.
First, a recent opinion by this court explicitly held that post-investment conduct is relevant
to determining the expectations of the parties at the time they entered the contract. See SEC
v. Sethi, No. 17-41022, 2018 WL 6322153, at *3 n.3 (5th Cir. Dec. 4, 2018). Second, other
circuits allow courts to look at “post-investment conduct.” Shields, 744 F.3d at 646; see also
Merch. Capital, 483 F.3d at 760; Koch, 928 F.2d at 1478 (looking to the “practical possibility
of the investors exercising the powers they possessed pursuant to the partnership
agreements.”). Third, even before the explicit holding in Sethi, this court, in nearly every
case, did in fact analyze post-investment activity. See, e.g., Nunez, 415 F. App’x at 590
(looking to the fact that the investor exercised power over the partnership’s finances); Long,
881 F.2d at 134 (crediting the jury’s conclusion that investors followed the manager’s
recommendations); Youmans, 791 F.2d at 347 (directing the trial court on remand to further
develop the “practical application” of the relevant contract provisions). Fourth, Gonzalez
cites no cases in support of his position—all his cited cases either (1) hold exactly the opposite
of what he argues, or (2) are distinguishable because they address situations where investors
delegated power to a manager after forming the initial contract. See, e.g., Holden v.
Hagopian, 978 F.2d 1115, 1119 n.6 (9th Cir. 1992).
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                                 No. 17-10503
surveys, (3) execute “any and all contracts and agreements,” (4) make “all”
elections or decisions and “bind the Joint Venture,” (5) make payments with
funds belonging to the projects, (6) execute operating agreements, and (7)
execute powers of attorney. Second, when dealing with third parties, the
Managers had the power to execute contracts that contained “such provisions
as the Managing Venturer deems expedient.”
      Third, the Managers had the power of the purse and could “charge the
Joint Venture . . . all reasonable expenses incurred by the Managing Venturer
in the operation of the Joint Venture.” Fourth, these powers were exclusive—
according to the JVA, no investor besides the Manager could “act on behalf of,
sign or bind the Joint Venture with respect to Operations of the Joint Venture.”
Finally, the Managers also had “sole and absolute discretion” to interpret
ambiguous or unclear provisions.
      While the Managers had significant power, the investors, at least
formally, were not without countervailing powers.          Most importantly, the
investors had the power to remove Arcturus and Aschere as managers with a
60% vote—a power this court has called “an essential attribute of a general
partner’s . . . authority.” Youmans, 791 F.2d at 347. This court has also held
that similar removal provisions do not divest investors of their power.
Williamson, 645 F.2d at 409, 424 (suggesting that 60% and 70% removal
requirements did not shield the manager from removal); Youmans, 791 F.2d at
346-47 (holding that the investors had power over the scheme, in part because
of a majority vote removal provision); see also Holden, 978 F.2d at 1120 (finding
no investment contract where manager could be removed with simple majority
vote). Nor is the 60% requirement as burdensome as removal provisions that
other courts have addressed. See, e.g., Merch. Capital, 483 F.3d at 757-58
(holding that provisions requiring unanimous, for-cause removal made
manager “effectively unremovable”).
                                       16
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                                  No. 17-10503
      The investors also had authority over almost all of the Managers’ powers.
For example, the JVAs clarify that the “Joint Venture and all of its affairs,
property, and Operations shall be managed and controlled by a majority of the
Venturers.”    The JVA also qualifies the Manager’s power by giving the
investors veto power—the seven “Operations” powers outlined above are all
subject to “the affirmative Vote of the Venturers.”         If this provision was
followed in practice, then the Manager could not bind the drilling project
without the investors voting to affirm. The investors also had the power to
develop rules and procedures governing meetings and voting, demand a
meeting, amend the JVA, receive financial information and information about
third-party transactions, and inspect the project’s books.           The signing
documents given to the investors also make clear that the investors will be
required to take an active role in governing the drilling projects. They also
clearly state that the venture is not a security, putting the investors “on notice”
that “federal securities acts” will not protect them. Williamson, 645 F.2d at
422. Further, if an investor did not send money for an assessment, it was
interpreted as a “no” vote, so the baseline voting rules did not necessarily favor
the Managers, unlike other cases. See Merch. Capital, 483 F.3d at 760 (“[T]he
voting process was tilted in [the defendant’s] favor from the very start. The
partnership agreement provided that unreturned and unvoted ballots were
voted in favor of management.”).
      Added together, these provisions, at least formally, give the investors
significant control over the drilling projects.       Indeed, nearly all of the
Managers’ powers are subject to an affirmative vote by the investors. Other
cases have held that investors with similar powers possessed control over the
partnership. See, e.g., Koch, 928 F.2d at 1478–79 (holding that partners had
at least formal power where “[a]dditional assessments of capital must be
approved by 75 percent of the partnership units; a majority of the partnership
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                                 No. 17-10503
units can remove any person from a management position; decisions regarding
the management and control of the business must be made by a majority vote”).
                     2. The Investors’ Powers in Practice
      But, as the case law makes clear, formal powers are not dispositive—
courts must determine whether investors can and do exercise those powers.
See, e.g., Youmans, 791 F.2d at 347 (directing the trial court on remand to
further develop the “practical application” of the relevant contract provisions).
Here, the record suggests that the investors utilized their powers. The record
shows votes taken on a variety of actions, such as increasing production units;
completion; workover and recompletion; new projects; and dissolution. The
record also contains communications from the Managers requesting a vote on
a subsequent cleanout proposal. Fifteen investors also submitted affidavits
declaring that they had the power to, and did in fact, vote on a variety of
decisions. And the record does not show that Arcturus or Aschere took any
significant actions without the investors’ prior approval. The fact that the
investors voted and took actions to manage the drilling projects makes this
case different than others where the district court appropriately granted
summary judgment. See Sethi, 2018 WL 6322153, at *4 (affirming the district
court’s grant of summary judgment where “[t]he investors never held a
meeting and did not vote on any matter.”).
                       3. The Projects’ Voting Structure
      The SEC and the district court placed great weight on the contract
provisions covering completion assessments and additional assessments.
When faced with the Managers’ recommendation to complete a well and enter
a turnkey completion contract, the investors can vote for or against completion.
If the investors vote to complete the well, then the project charges them a
completion assessment of up to $100,000.        If an investor fails to pay the
assessment, then he is considered to have abandoned his interest.             For
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                                      No. 17-10503
additional assessments, if the investors vote to approve additional work, each
investor has one of three choices. Investors must either pay the assessment,
abandon their interest, or pay a penalty if they pay the assessment late. An
investor who pays late becomes a non-participating investor and can be
reinstated only by paying the penalty. This arrangement, according to the
SEC, presents investors with a Hobson’s choice—follow the manager’s
recommendation or you are out. 14
       These provisions, however, do not operate like the SEC suggests. To help
clarify, these provisions must be placed in the context of an inherently
speculative investment like drilling. One law review article describes the
initial payment in these contracts as the cost of “being allowed to participate”
until the point when the investors choose whether to complete the well. R.K.
Pezold & Danny Richey, The “Industry Deal” Among Oil and Gas Companies
and the Federal Securities Acts, 16 Tex. Tech L. Rev. 827, 833 (1985)
[hereinafter, Industry Deal]. Splitting the process into drilling and completion
makes sense because it allows investors to get a glimpse inside the well without
paying for completion upfront. Only later, after gathering more information
from the drilling process, do investors choose if they want to complete the well.
This split between the initial drilling and completion effectively gives investors
an additional chance to cut their losses. The signing papers follow this general
split and make clear that investors are only entering a turnkey drilling
contract—completion, which is not mandatory, requires additional investment.




       14  The SEC argues that investors who oppose the Manager’s recommendation are
either charged a penalty or kicked out of the project. But that assertion is not true. We
cannot find anywhere in the offering documents where an investor is kicked out for voting
against the Manager’s recommendation. The only reason an investor is kicked out is for
failing to pay his proportionate share of completion costs after an affirmative vote has been
taken.
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                                       No. 17-10503
        Returning to the investors’ choices with this basic background, the
arrangement does not strip the investors of power. If an investor votes for
completion, he does not lose power because he must pay for completion costs.
If the investor thinks the well is a lost cause, then allowing him to abandon his
interest also does not strip him of power. The entire project is presumptively
organized around one well—if the investor thinks it is not going to be profitable
after drilling, then he likely would want out of the project without wasting
additional money. 15 These investors are free to “stand aside, incur no further
costs, and allow the ‘consenting owners’ to proceed with any completion
activities desired.” Industry Deal, at 833 n.27.
        When it comes to subsequent operations, if an investor is unclear what
to do, he can avoid paying. The investor then becomes a non-participating
investor. But the investor’s initial silence is not permanent—the investor can
pay a “pre-agreed and substantial economic penalty” and become a
participating investor again. Industry Deal, at 834 n.27. This penalty also
makes sense. When an investor fails to pay operation costs, other participating
investors are forced to take up the financial slack, increasing their risk. The
penalty serves to compensate the “risk-taking” investors who bore the added
risk.        Industry Deal, at 834 n.27.           While the SEC argues that these
consequences eliminate any voting power, they can be seen in a more positive
light as preventing free-riding.
        The case law, while not oil-and-gas specific, further supports this
intuition. In Williamson, this court did not attach any significance to a similar
voting plan. 645 F.2d at 409. The voting plan there required the manager to
present the investors with “any proposal for development.” Id. at 409. The


        15An email from at least one investor confirms this intuition. In the email, the
investor, angry at the project’s failure, says that he is “far more comfortable not losing more
money than . . . putting more into this losing project.”
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                                       No. 17-10503
investors could approve the proposal by a “vote of the holders of 60% or 70% in
joint venture interests.”        Id.   Importantly, if the investors accepted the
proposal, the investors who approved it were “obligated to purchase the
interests of those who [did] not.” Id. Structurally, the consequences were like
those here—vote yes, pay more money; vote no, you are out. 16 If such a
structure was not a Hobson’s choice there, it is unclear why it would be here.
                       4. The Source of Investors’ Information
       The SEC argues, and the district court held, that the investors’ powers
were weak because they relied on the Managers for information about the
drilling projects. 17 Some case law does suggest that investors are powerless
when all of their pertinent information comes from the managers. 18 But mere
control over information does not, on its own, strip investors of their power to
vote. The source of information only matters when the investors do not receive
enough information to make an educated decision.                    See Sethi, 2018 WL
6322153, at *4 (affirming the district court’s grant of summary judgment
because the defendant “gave the investors little to no information”); Merch.
Capital, 483 F.3d at 759 (“[The defendant] controlled how much information


       16The main difference was that dissenters in Williamson got their investments back,
but that has more to do with riskiness than control of the venture.

       17  Control of information can go to the first or second Williamson factors. See Long,
881 F.2d at 137. It goes to the first factor when the party in control of information prevents
otherwise competent investors from exercising control over the partnership or venture. For
example, the controlling party can provide only a small amount of information that supports
its position. See Merch. Capital, 483 F.3d at 759. Control of information goes to the second
factor when the investors are not sophisticated enough to understand the information they
are given. See Long, 881 F.2d at 135–36.

       18 The SEC relies on Long for this point, but this reliance is misplaced. Long was
primarily about whether investors can acquire experience and knowledge from the
defendant—the second Williamson factor—not the source of the information. When it came
to the first Williamson factor, the court in Long relied on the jury’s conclusion that the
investors relied exclusively on the defendant’s recommendations, as established by a
documented pattern of voting. See Long, 881 F.3d at 134.
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                                  No. 17-10503
appeared in the ballots, and did not submit sufficient information for the
partners to be able to make meaningful decisions to approve or disapprove debt
purchases.”). In Merchant Capital, for example, the Eleventh Circuit held that
investors could not effectively exercise their voting rights because the manager
only gave investors three pieces of information, which was not “sufficient
information for the partners to be able to make meaningful decisions.” Id. at
759. This conclusion was established at trial by expert testimony. Id.
        This case is not like Merchant Capital.       The record suggests that
investors had numerous sources of information. The Managers sent email
updates to the investors on numerous occasions. Some emails contained day-
by-day updates.        Other emails in the record had attachments of
“comprehensive digital daily drilling reports.” Another email references a 24-
hour “video surveillance” system being installed for remote access of visual
management of drilling operations.” Some emails in the record welcomed
investors to come visit the drilling site.       And fifteen different investors
corroborated this record evidence with affidavits, declaring that they stayed
well-informed through “persistent status updates” in the form of “geologic data,
well data, proposed oil and gas contracts, . . . video surveillance and other forms
of live monitoring.” All this information goes far beyond the three pieces of
information provided to investors in Merchant Capital. More importantly, this
court does not have the “trial testimony” of numerous witnesses and experts to
determine, as a matter of law, that the investors had enough information to
“make an informed decision.” Merch. Capital, 483 F.3d at 758.
         The SEC also seems to suggest that the investors lacked control because
the Managers picked the experts who were providing much of the technical
data.    But it is unclear whether this choice mattered.       It is possible, for
example, that the Managers were simply conduits for information—the
consultants sent the Managers information about the well, which the
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                                       No. 17-10503
Managers then passed to the investors.                 As noted above, the Managers
sometimes passed along the raw data they received from the operators. If the
investors and Managers had access to the exact same data, the investors could
draw their own conclusions about the prospect wells. And the SEC does not
point to any facts showing that the consultants presented biased information.
Nor does the SEC point to any facts showing that the Managers misled the
investors with false or altered information.
                              5. Investor Communications
       The SEC argues that the investors’ powers were useless because they
could not contact each other and coordinate their votes. The SEC also argues
that the Defendants would not release investor contact information.                       The
record lends some support to these contentions. 19 According to one investor,
Douglas Traver, Parvizian withheld investor information at least once. Four
of the six JVAs also protected investor contact information as “confidential and
a trade secret of the Managing Venturer.” For these four projects, no investor
was entitled to learn the identity of other investors. And when the Managers
sent emails to all of the investors on a given project, they generally blind-copied
the recipients, preventing them from easily contacting other investors. Most
troublingly, one investor, Richard Ullrey, declared that Parvizian threatened
legal action against him for contacting other investors.
       The case law adds force to these arguments. Courts have previously held
that investors might lack real power if they are unacquainted and unable to




       19  The district court placed weight on the fact that the investors were “located across
the United States.” But this factor originated with a Supreme Court opinion from 1946, and
it is antiquated today. Howey, 328 U.S. at 299. The investors, if they had contact information
for each other, could communicate using telephone, email, text messages, or video calls.
While physical proximity still deserves some weight—it might, for example, play some role
in facilitating introductions—it is not necessarily a critical factor with the many forms of
communication available today.
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                                      No. 17-10503
communicate. Merch. Capital, 483 F.3d at 758 n.8 (holding that partners did
not have meaningful voting power, in part, because “[s]uch a move would have
required a two-thirds vote of geographically distant, unacquainted partners”);
cf. Howey, 328 U.S. at 299.
       But the record is not as clear as the SEC suggests. The record shows
that the investors did in fact communicate with each other.                            They
communicated on phone calls. The record also contains emails between a
multitude of investors communicating about a vote to complete a drilling
project. Several investors also declared that they communicated with each
other at venture meetings. Another investor declared that he received investor
contact information. The record also shows documents in which the Managers
identified the other investors. And even though Ullrey declared that he feared
contacting other investors after Parvizian allegedly threatened him, he
nevertheless sent emails to other investors two years later.
       The district court did not analyze these documents.                 With so many
investors declaring that they could communicate with each other, and evidence
of actual communications, the Defendants raised a genuine issue about
whether the investors could communicate with each other and organize.
Ullrey’s potentially conflicting statements are a case in point on why a full
factual hearing with cross-examination is needed.
                              6. The Number of Investors
       Each drilling project had anywhere from 35 to 108 investors. These
numbers run on the high end of the case law. And they seem to be on the high
end of industry norms. 20 But at least one case held that 160 investors in a
partnership was not a number so large that each partner’s role was “diluted to


       20In Industry Deal, the authors explain that these contracts are normally structured
with three investors and an operator on a “third-for-a-quarter” basis. Industry Deal, at 833.
Investors pay one-third of the drilling costs and receive one-quarter of the revenue.
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                                  No. 17-10503
the level of a single shareholder.” Koch, 928 F.2d at 1479 & n.12; see also
Rivanna, 840 F.2d at 242 n.10 (4th Cir. 1988) (Powell, J., sitting by
designation) (finding that a partnership with 23 members was not a security).
Further factual development is needed to determine whether the size of each
drilling project stripped the investors of their power.
                 7. Conclusion of the First Williamson Factor
      In sum, there is evidence in the record that (1) the investors had formal
powers, (2) they used these powers, (3) the voting structure was not necessarily
coercive, (4) the investors received information, (5) they communicated with
each other, and (6) the number of investors was not so high that it eliminated
all of their power. We reverse the district court’s ruling on the first Williamson
factor.
                  B. THE SECOND WILLIAMSON FACTOR
      The second Williamson factor is whether the drilling project investors
were “so inexperienced and unknowledgeable in business affairs” that they
were “incapable of intelligently exercising” their powers. Williamson, 645 F.2d
at 424. The second Williamson factor applies to both investors and offerees.
Generally, an interest in a partnership is more likely to be a security if it is
sold to “inexperienced and unknowledgeable members of the general public.”
Id. at 423. But proving that investors are inexperienced requires evidence
about the investors themselves. See Merch. Capital, 483 F.3d at 762 (“[T]he
SEC presented uncontradicted evidence that the individual partners had no
experience in the debt purchasing business.”); Nunez, 415 F. App’x at 589
(examining the experience of the individual plaintiff); Williamson, 645 F.2d at
424–25 (examining the experience of each investor). And investor expertise
“must be considered in relation to the nature of the underlying venture.” Long,
881 F.2d at 135. This requirement, however, should not be read to suggest
that investors necessarily need a specialized background. If evidence shows
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                                  No. 17-10503
that an investor can intelligently control his investment, then courts do not
require specialized experience. See, e.g., Robinson v. Glynn, 349 F.3d 166, 171
(4th Cir. 2003) (holding that specialized experience was not required because
the investor showed he was capable of managing his investment); Youmans,
791 F.2d at 343, 347 (finding the plaintiff, a physician, sufficiently experienced
because he “also engaged in a number of business transactions not connected
with [the defendants]”).
      For example, in Long the investors purchased interests in a cattle farm,
with each investor buying individual cows that were jointly managed by the
defendants. 881 F.2d at 134–136. One important question was whether the
investors had enough knowledge to manage their own herd of cattle. And when
answering this question, the court did not look only to investors’ experience in
cattle raising—it looked to the investors’ attempts to manage the cattle they
purchased from the defendants.
      Looking at those actions, the court easily concluded that the investors
“lacked the experience necessary to care for, feed, and market their cattle.” Id.
at 135. Some investors “visited the feedyard on one occasion,” but “there was
no evidence that [they] sought to give any individual instruction regarding the
care and feeding of their cattle.” Id. One of the investors even “expressed the
mistaken impression that a heifer was a breed of cattle.” Id. The investors’
actions, established at trial, showed that they could not manage their
investments, and their lack of specialized experience was the reason why.
      Similarly, in Nunez an investor-plaintiff argued that he was forced to
rely on the manager because he lacked experience in “sand and gravel mining.”
415 F. App’x at 589. The investor, however, had taken a variety of actions to
manage his investment. Id. at 590 (“The record establishes that [the investor]
participated in other managerial decisions in his role as managing partner.”).
Even if the investor lacked specialized experience, he failed to prove that this
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                                     No. 17-10503
lack of experience prevented him from “meaningfully exercis[ing] his
managerial powers.” Id. at 591.
                                    1. The Investors
      Here, the SEC argues that the investors were inexperienced for two
reasons.    First, the Defendants engaged in an indiscriminate cold-calling
campaign that did not seek out experienced investors. Second, the SEC points
to statements from four investors that they were inexperienced in drilling
investments. These arguments are not dispositive—at summary judgment, we
cannot make an inference about a group of over 340 investors based on this
limited evidence.
      The cold-calling campaign is probative of the investors’ experience. In
assessing the second Williamson factor, courts rightly examine how a
partnership acquired its members. See, e.g., Long, 881 F.2d at 135 (holding
that investors in a cattle farm were not experienced, in part, because the
scheme “advertised its feeding program in financial publications . . . and in
large-city newspapers . . . and did not advertise in agricultural periodicals or
in other publications likely to have a readership acquainted with cattle-
feeding”). A court can glean information about investors by examining how
and from where the partnership attracted them.                 But when determining
whether investors are experienced, looking at marketing methods is, at best,
circumstantial evidence about the investors. 21 A better place to look is directly


      21  The SEC stressed the nationwide cold-calling campaign in their briefs and oral
argument. By emphasizing that the Defendants called investors across the country from a
purchased lead list, the SEC likened the Defendants’ marketing strategy to that of an
indiscriminate telemarketer. If the SEC had presented undisputed evidence that the
Defendants used indiscriminate marketing methods, then we agree that this case would fall
into the purview of Long. But this case differs from Long and other similar cases.

       In Long, the court confronted undisputed evidence that the defendants sought
inexperienced investors—the defendants conceded so at trial. Id. at 135. Here, by contrast,
the Defendants maintain that they did not seek out inexperienced investors. And they
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                                       No. 17-10503
at the investors’ actual qualifications. The case law follows this analysis,
looking to investor qualifications and using advertisement methods, if at all,
merely to bolster a conclusion—it is rarely the only piece of evidence. See, e.g.,
Long, 881 F.2d at 134–36 (looking to actual evidence of investor experience and
then looking to advertising method); Aqua-Sonic, 687 F.2d 577, 583 (2d Cir.
1982) (same); see also Williamson, 645 F.2d at 425 (looking to each investor’s
business experience alone).          And when it comes to the investors’ actual
experience, the record does not clearly entitle the SEC to summary judgment.
       As the Defendants point out, the record shows that many investors did,
in fact, have experience in oil and gas drilling. For example, one investor
declared that he had “an engineering background” and “participated in other
energy ventures with Escondido and Patriot Energy.” In an email, another
investor disclosed that he had “done 83 of these projects over the last ten
years.”    Another investor declared that he has “extensive experience in
investing in domestic energy and often defer[s] to the advice of [his] energy
advisors and petroleum engineers.”                Still others had general business
experience.
       The record also shows that various investors had advisors helping them
make decisions—an important factor in the caselaw. See, e.g., Robinson, 349
F.3d at 171; Banghart v. Hollywood Gen. P’ship 902 F.2d 805, 808 n.5 (10th
Cir. 1990); Rivanna, 840 F.2d at 242 n.10. Balunas stated that many investors




support this argument with competent summary judgment evidence, which, if believed by a
factfinder, would show that they sought experienced investors. The record suggests that the
potential investors on the lead list were vetted for investing experience before being added to
the list. The record also suggests that many investors had prior experience with the
Defendants. At summary judgment, viewing the evidence in the light most favorable to the
Defendants, we cannot conclude that the Defendants sought out inexperienced investors.
The SEC failed to eliminate genuine issues of material fact about the scope of the Defendants’
marketing and the types of investors they targeted. These questions are better resolved by
a factfinder.
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                                        No. 17-10503
“had their CPAs or attorneys call” the Defendants before investing. Others
personally visited the well or spoke with the drilling operator or onsite drilling
engineers. Another stated that he has “extensive experience in investing in
domestic energy and often defer[s] to the advice of [his] energy advisors and
petroleum engineers.”
       The Defendants also required the investors to represent that they had
business experience and were capable of intelligently exercising their
management powers. 22 The CIM made clear that only qualified investors were
eligible.    The investors were also required to represent that they were
accredited investors. 23 And several of the investors invested in prior Parvizian
ventures, a factor that this court previously relied upon when holding that
investors were experienced. See Williamson, 645 F.2d at 425 (“The defendants’
exhibits contain documents from previous ventures which indicate that [two
investors] had already been members of other joint ventures organized by [the
managers].”).


       22  The Defendants belatedly argue that they might qualify for an exemption from the
Securities Act. In 2012, the SEC amended Rule 506 to permit “an issuer to engage in general
solicitation or general advertising in offering and selling securities pursuant to Rule 506”
without registering the securities, so long as the issuer meets two requirements: (1) “all
purchasers of the securities are accredited investors” and (2) “the issuer takes reasonable
steps to verify that such purchasers are accredited investors.”        SEC, Eliminating the
Prohibition Against Gen. Solicitation & Gen. Advert. in Rule 506 & Rule 144a Offerings,
Release No. 3624 (July 10, 2013). Because the Defendants required all investors to represent
that they were accredited investors, Parvizian argues that this exception applies.

        Parvizian waived this argument by not raising it earlier. Hightower v. Tex. Hosp.
Ass’n, 73 F.3d 43, 44 (5th Cir. 1996) (holding that arguments raised for the first time in a
petition for rehearing were “raised too late in the appellate process to be useful to this court,
and they are deemed waived and have played no role in our decision”). But even if he had
raised it, the transactions at issue occurred before these amendments, and he cites no
legislative or judicial authority that they should apply retroactively.

        An “accredited” investor is a person with a net worth over $1,000,000 independently
       23

or combined with a spouse or with individual income over $200,000 or joint income over
$300,000.

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                                  No. 17-10503
      The SEC specifically points to statements by Ullrey that he “relied on
[Parvizian’s] determination [that completion of a well was appropriate] with
no means to verify that this determination was correct” when he voted to
complete a well.     But many other courts have refused to transform an
investment into a security based on similar statements without further
corroborating proof. See, e.g., Nunez, 415 F. App’x at 589; Robinson, 349 F.3d
at 172; Banghart, 902 F.2d at 808 n.5. At summary judgment, this evidence is
insufficient to eliminate all questions of material fact.
      While Ullrey implies that he was an unsophisticated oil and gas investor,
his email to Parvizian—one of the few emails we have from him—paints a
different picture. That email states that (1) he understood a fair amount of the
underlying “geology” of different wells and felt capable of “comparing” reports
from “each geologist”; (2) he was comfortable analyzing the “engineering”
across wells; (3) he knew many drilling acronyms and terms; and (4) he knew
how to analyze production zones and past production history. As one example
that he might not be as unsophisticated as the SEC argues, he specifically
asked why fracking technology had not been used even though “the gas
production has been 140 MCF monthly for 2008 and 2009” and “the fractional
technology has been available for at least as long as this well has been in
existence.”
      Outside of questions about his technological knowledge, the summary
judgment record does not show conclusively that Ullrey was unsophisticated.
He had an investment advisor he consulted. And, as noted above, courts have
held that an advisor is a critical fact showing that an investor does not lack
sophistication. See, e.g., Robinson, 349 F.3d at 171; Banghart, 902 F.2d at 808
n.5; Rivanna, 840 F.2d at 242 n.10. He was a CPA and stated that he would
feel comfortable analyzing the finances of the joint venture. He also organized
a lot of investors into an email thread.
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                                 No. 17-10503
      This mixed record about Ullrey is a case in point.          The summary
judgment evidence about Ullrey is mixed, he has not been subjected to cross-
examination,    and   his   statements      present   quintessential   credibility
determinations. On summary judgment with the current record, we cannot
conclude, as a matter of law, that Ullrey was inexperienced, as inexperienced
is defined by Williamson and its progeny. A jury is better suited to determining
whether Ullrey was capable of intelligently controlling his investments.
      Nor can the court determine whether any of the unidentified investors
were inexperienced. Through competing summary judgment motions, both
parties asked the court to determine that the pool of over 340 investors had or
lacked experience based on limited evidence about roughly 25. At summary
judgment, the court cannot make factual inferences about roughly 340
investors based on such limited evidence, especially when that evidence is
mixed.
                                2. The Offerees
      The SEC also argues that the Defendants targeted inexperienced
offerees. But the record with respect to offerees is limited. And the limited
summary judgment record does not allow us to conclude, as a matter of law,
that the offerees were necessarily inexperienced.
      First, the tenor of the evidence is that the cold-call list was not meant to
include inexperienced offerees. Cooper stated that the list might have included
only accredited investors. He also suggested that salespeople did not target
only new, accredited clients—they also called current clients, who would have
prior knowledge of the Defendants. This prior relationship, as noted above, is
an important factor in the caselaw. See Williamson, 645 F.2d at 425. Balunas
also indicated that he only made offers to accredited investors. Meanwhile, the
SEC presented no evidence to challenge these facts, which we must consider in
the light most favorable to the Defendants.
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                                        No. 17-10503
       Second, the evidence about investors—a sample that sheds light on the
offerees—indicates that many were experienced in oil and gas investment.
Other courts have used similar reasoning, inferring the offerees’ qualifications
from the group of eventual investors. For example, in Aqua-Sonic, the Second
Circuit used investor qualifications to shed light on the type of investor that
the defendant was targeting (i.e., to determine the offerees’ qualifications). 687
F.2d at 583–84 (“However, none of the 50 licensees had any such [specialized]
experience. This was not mere coincidence. The record does not indicate that
any attempts were made to locate such purchasers.”). Taking the eventual
investors as a sample of the offerees, we cannot conclude that the offerees
lacked experience.        But we are equally incapable of making the opposite
inference. Both parties seek to use a small subset of investors to establish the
experience level of the entire group of offerees. And they both seek to do so
without any direct evidence about the offerees’ qualifications.                     Given the
limited record and the procedural posture—summary judgment—we cannot
determine whether the offerees were experienced or not.                         This factual
determination is better left to a finder of fact.
                   3. Conclusion of the Second Williamson Factor
       These facts taken together raise a genuine issue about the offerees’ and
investors’ knowledge and experience. 24 The SEC’s evidence does show that at




       24 The SEC argues that all investors and offerees need specialized experience. But no
court has ever explicitly held that every investor needs specialized experience. Courts,
instead, have taken a holistic view of the investors, the type of business at issue, and the deal
struck by the parties. See, e.g., Long, 881 F.2d at 134–136; Howey, 328 U.S. at 296. These
facts, along with others, help the court determine whether the investors had enough
experience to intelligently exercise their partnership powers. We note, however, that in at
least one other case, we did not require all investors in a partnership to have specialized
experience where other evidence showed they could control their investments. See
Williamson, 645 F.2d at 424–25.

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                                     No. 17-10503
least some investors were not experienced, 25 but not enough to grant summary
judgment in the face of the Defendants’ competing evidence, especially on “a
question of fact which should be resolved in the first instance by the trial
court.” Koch, 928 F.2d at 1479. We, therefore, reverse the district court’s
decision to grant summary judgment on the second Williamson factor.
                     C. THE THIRD WILLIAMSON FACTOR
      The third Williamson factor is whether the investors are so “dependent
on some unique entrepreneurial or managerial ability of [the Managers] that
[they] cannot replace the manager of the enterprise or otherwise exercise
meaningful partnership or venture powers.” Williamson, 645 F.2d at 424. As
explained in Williamson, this factor looks to the unique capabilities of the
manager. If the manager has a “non-replaceable expertise” that drew the
investors to the venture, then they might “be left with no meaningful option”
other than the manager. Id. at 423. For example, investors may be induced to
enter a “real estate partnership on the promise that the partnership’s manager
has some unique understanding of the real estate market in the area in which
the partnership is to invest.” Id. Any right to “replace the manager” would
only come at the expense of “forfeiting the management ability on which the
success of the venture is dependent.” Id. Dependence, however, does not
extend to the delegation of management duties—“[t]he delegation of rights and
duties—standing alone—does not give rise to the sort of dependence on others
which underlies the third prong of the Howey test.” Id.




      25  This evidence consists mainly of brief statements by investors. One investor said
that he did not “understand everything,” but the record contains no other information about
him. Another investor claimed that she was a “novice investor.” Again, the record has no
further information about her. Another claimed that he was “new to the oil industry.” The
record contains no further evidence about him either. Finally, one “inexperienced” investor
had over $2,000,000 in assets, was an engineering director, and had an investment advisor.
A fact-finder is better suited to weigh the probative value of this evidence.
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                                 No. 17-10503
      Here, the SEC argues that the Managers were effectively irreplaceable
not because of some special skill, but because they had the sole ability to
enforce drilling contracts with the subcontractors and unfettered control over
the drilling projects’ assets. According to the CIMs and JVAs, all investor
funds would be transferred to one of the Managers, who would then
subcontract with other companies, which were identified in the CIMs, to
complete the drilling. According to the SEC, this created two problems. First,
even if the investors removed the Managers, they would still be party to the
contracts with the subcontractors, making the investors reliant on them—even
if removed, the Managers still had the power to enforce, or not enforce, the
drilling contracts. Second, the Managers controlled all of the investors’ funds.
Funds were transferred from the drilling projects into an operating account at
Aschere or Arcturus, and investors had no right to the funds. At least one case
held that a manager is effectively irremovable where it controls investors’
funds and has the sole ability to recoup them. Merch. Capital, 483 F.3d at 764.
      Neither of the SEC’s arguments is convincing. The first argument is
unconvincing because the record is not clear enough to say, as a matter of law,
that the web of contracts between the projects, Managers, and subcontractors
made the Managers irremovable. Nothing in the record demonstrates that, if
Arcturus or Aschere were removed, the drilling projects would be unable to
enforce their contracts. On the contrary, the record suggests that the drilling
projects would still have contracts with Aschere and Arcturus, who, in turn,
would have enforceable contractual relationships with the subcontractors.
Nothing in the record suggests that a new manager could not enforce the
contract with Aschere or Arcturus through this relationship. And if Aschere
or Arcturus failed to perform after being paid, the drilling projects would be in
the same position as if some other contracting company failed to perform.


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                                 No. 17-10503
        The state of the record in this case contrasts markedly with Merchant
Capital—the primary case that the SEC cites for their argument. In Merchant
Capital, the structure of the contractual relationships was like the structure
here.    The defendant managers there took funds from multiple investors,
pooled them, and then pooled them again. The defendants, on behalf of the
partnership, entered into a contract with a service-providing company, New
Vision, who then entered into a contract with another company, EAM. Investor
funds were pooled by New Vision, and then repooled with other funds by EAM.
The ultimate question was whether (1) individual investors could get their
funds back from the defendant, or (2) they depended on the defendant to get
their funds back.
        The court held that the investors depended on the defendant for two
reasons. First, the defendant did not have effective contractual rights against
the service companies. The defendant had pooled the partnership’s funds in
accounts “owned by New Vision.” Id. at 764. And the defendant could not get
those funds back except “in limited circumstances, or upon termination of the
entire contract.” Id. Second, even if the investors replaced the defendant with
a new manager, the right to demand return of investor funds belonged solely
to the defendant, not to the partnership. Id. Notably, all of these practical
difficulties with removing the defendant were established at trial.        Here,
though, the SEC merely assumes that the right to enforce the contracts with
drilling subcontractors sits solely with the Managers, like in Merchant Capital.
But no evidence shows that the investors would be unable to enforce a drilling
contract if Arcturus or Aschere were removed as the Manager.
        While it is true that the Managers made contractual promises to find
subcontractors to do the drilling, a mere contractual promise is not enough to
find the Managers irreplaceable.     In Williamson, like here, the manager,
Godwin Investments, drafted the relevant venture agreements and promised
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                                  No. 17-10503
to perform most of the significant tasks in a real estate venture, like developing
the land and rezoning it. But the court held that these contractual provisions
were not enough to satisfy the third Williamson factor—more is required to
establish irremovability than mere contractual relationships.
      It is true that the Property would ultimately have to be developed
      or sold, and in the interim managed, before a profit could be
      returned on it; and it is true that Godwin Investments promised to
      perform these tasks. But this alone does not establish a
      dependence on Godwin Investments so great as to deprive the
      plaintiffs of their partnership powers. The plaintiffs must allege
      that Godwin Investments was uniquely capable of such tasks or
      that the partners were incapable, within reasonable limits, of
      finding a replacement manager. Godwin Investment’s promise
      must be more than a binding contract enforceable under state law;
      it must create the sort of dependence implicit in an investment
      contract.
Williamson, 645 F.2d at 425 (emphasis added). In short, Aschere and Arcturus
are not irreplaceable simply because they made contractual promises to the
drilling projects.
      The SEC’s second argument—the Managers were irremovable because
they controlled all of the investors’ funds—is unconvincing for two reasons.
First, the investors never expected to recover their funds unless the oil and gas
wells became productive.      The investors did not invest in a pool of debt
instruments from which they could withdraw their funds, like in Merchant
Capital. The investors sunk their capital into an exploratory drilling project
knowing that they would not get it back unless the well became productive.
And making the well productive would require further investment.              They
essentially bought the right to see if the well might be productive, and, if so, to
invest in completing the well. The investors could not get back their funds
because they spent them on an exploratory drilling contract—one phase of the
total operation—not because the Managers controlled them.


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                                 No. 17-10503
      Second, the investment here was segmented, as noted above. This case
would present a different question if the investors, from the outset, gave all of
their funds to the Managers for every phase of the contract—drilling,
completion, and subsequent operations—and then the Managers transferred
those funds to themselves.       In that situation, the Managers might be
irreplaceable.
      At least one case suggests that locking investors from the outset into
turnkey contracts with the manager for each stage of the process might make
a manager irreplaceable. SEC v. Shields dealt with an almost identical drilling
project, but at the motion to dismiss stage. There, the court held that the SEC
stated enough facts to satisfy the first Williamson factor. Shields, 744 F.3d at
645. The first factor was satisfied, even though the investors had the power to
remove the manager, because the manager hired itself as the main contractor
for the “turnkey drilling and completion contracts.” Id. at 647 (emphasis
added).   Here, though, the investors were not locked into drilling and
completion contracts—they plausibly were able to cut Aschere and Arcturus
out of any completion contracts or subsequent operations.
      The Defendants put forth enough evidence to raise a genuine issue
concerning whether the Managers were effectively irreplaceable.              We,
therefore, reverse the district court’s ruling on the third Williamson factor.
                             III. CONCLUSION
      In sum, the Defendants raised several issues of material fact that the
district court failed to consider. For the foregoing reasons, the judgment of the
district court is REVERSED and REMANDED for trial.




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