The question of whether baseball cards can be considered securities is a complex issue that involves reviewing various laws and regulations. For something to be considered a security, it must meet certain definitions established by securities laws and regulations. So let’s take a deeper look at this question:
The key law that defines what constitutes a security in the United States is the Securities Act of 1933 and the Securities Exchange Act of 1934. Section 2(a)(1) of the 1933 Act broadly defines a security as “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”
While baseball cards are not explicitly mentioned in the definition, they could potentially fall under the category of an “investment contract.” The key test for determining whether something qualifies as an “investment contract” and thus a security is the Howey Test established by the Supreme Court in SEC v. W.J. Howey Co. in 1946. The Howey Test outlines three requirements for something to be considered an investment contract: 1) it involves an investment of money, 2) in a common enterprise, 3) with an expectation of profits to be generated solely from the efforts of others.
When analyzing baseball cards against the Howey Test, there are good arguments on both sides as to whether they meet the definition of a security. On the one hand, people clearly invest money to purchase baseball cards, satisfying the first prong. And there is an active secondary market where fans can sell valuable cards for a profit, indicating an expectation of profit, the third prong. It would be difficult to argue that buying a pack of baseball cards or an individual card constitutes a “common enterprise” as required by the second prong. Cards are purchased individually from retailers and their value depends mainly on random scarcity and individual player performance, not so much a common enterprise.
The Securities and Exchange Commission and courts have also offered guidance specifically focused on collectibles like trading cards. In 1996, the SEC released a report stating that individual purchases of trading cards for personal enjoyment or collection would not generally constitute an investment contract and thus not be a security. The report noted that certain arrangements involving trading card purchases could meet the Howey test and qualify as securities, such as when a common enterprise manages trading card assets. In 1985 the 11th Circuit Court of Appeals ruled in SEC v. G. Weeks Securities that rare coin purchases were not securities because they were purchased for consumptive purposes like enjoyment, not for an investment seeking profits through others’ efforts. These rulings suggest baseball cards purchased individually for collection or enjoyment are also likely not considered securities.
While there remains some ambiguity, based on the legal definitions and precedent established thus far, purchasing individual baseball cards for personal collection and enjoyment alone does not generally meet the threshold to qualify them as securities or investment contracts. Certain schemes involving pooled trading card assets or derivative financial instruments related to cards could potentially be considered securities depending on the specific facts and how profits are expected to be generated. Standard individual card purchases and resales have generally not been seen as constituting a common enterprise necessitating full securities regulation. But there may still be some unresolved issues at the margins depending on how investment strategies involving cards are structured.
While the law does not provide a definitive bright-line answer, most analysis suggests that standard baseball cards purchased individually as collectibles for personal enjoyment are likely not securities according to current precedent. Certain arrangements involving trading cards could potentially qualify as investment contracts depending on the structure and fulfillment of the Howey Test requirements. It remains an issue with some open questions, but individual cards themselves have generally not triggered full securities regulation to date.
