This section contains the nature of the case and procedural background.

Gross (D) solicited buyer-investors to raise earthworms in order to meet quotas to fishermen. Buyers were promised that the seller's growing instructions would enable buyers to have a profitable farm, that the time involved would be similar to raising a garden, that the earthworms double in quantity every sixty days, and that the seller would buy back all bait size worms produced by buyers at $2.25 per pound. D promised the Smiths (P) a profitable farm via a repurchase agreement from him with minimal promised effort on their part. D would handle the marketing and sales of the fully-grown earthworms to the fishermen. Ps allege that, contrary to D's representations, worms multiply at a maximum of eight rather than 64 times per year. Ps also allege that $2.25 is greater than the true market price and that D could pay that price only by selling the worms to new worm farmers at inflated prices. The price D sold the worms to worm farmers was ten times in excess of the true market value. There is little market for worms in the Phoenix area. P contends that the transactions involved an investment contract type of security. The District Court dismissed the suit for lack of subject matter jurisdiction; there was no security involved. P appealed.

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