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F ederal

reserve

Ba n k

DALLAS, TEXAS

of

Dallas

75222

Circular No* 69-1^2
June 9, 1969

AN INTERPRETATION - REGULATION G

To Nonbank Lenders and Others Concerned
in the Eleventh Federal Reserve District:
Enclosed is a copy of an interpretation under
Regulation G.

This interpretation is based on a recent

letter ruling of the Board as to whether an extension of
credit is made by a contribution to a joint venture when
the contribution is disproportionate to the contributor's
share in the venture's profits or losses.
This interpretation will be published shortly
In the Tgaeral Register “and'
Federal Iteserve Bulletin.
Yours very truly,

P. E. Coldwell
President
Enclosure (l)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

TITLE 12— BANKS AND BANKING

CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Reg. G]
PART 207— CREDIT BY PERSONS OTHER THAN BANKS, BROKERS,
OR DEALERS FOR THE PURPOSE OF PURCHASING OR
CARRYING REGISTERED EQUITY SECURITIES
Contribution to Joint Venture as Extension of Credit

§ 207•104

Contribution to joint venture as extension of credit when the
contribution is disproportionate to the contributor’s share
in the venture's profits or losses.
(a) The Board recently considered the question whether a joint

venture, structured so that the amount of capital contribution to the
venture would be disproportionate to the right of participation in prof­
its or losses, constitutes an "extension of credit" for the purpose of
Regulation G.
(b) An individual and a corporation plan to establish a joint
venture to engage in the business of buying and selling securities,
including registered equity securities.

The individual would contribute

20 per cent of the capital and receive 80 per cent of the profits or
losses; the corporate share would be the reverse.

In computing profits

or losses, each participant would first receive interest at the rate of
8 per cent on his respective capital contribution.

Although purchases

and sales would be mutually agreed upon, the corporation could liquidate
the joint portfolio if the individual’s share of the losses equaled or

2-

exceeded his 20 per cent contribution to the venture.

The corporation

would hold the securities, and upon termination of the venture, the
assets would first be applied to repayment of capital contributions,
(c) In general, the relationship of joint venture is created
when two or more persons combine their money, property, or time in the
conduct of some particular line of trade or some particular business
and agree to share jointly, or in proportion to capital contributed,
the profits and losses of the undertaking.
(d) The incidents of the joint venture described above, how­
ever, closely parallel those of an extension of margin credit, with the
corporation as lender and the individual as borrower.

The corporation

supplies 80 per cent of the purchase price of securities in exchange
for a net return of 8 per cent of the amount advanced plus 20 per cent
of any gain.

Like a lender of securities credit, the corporation is

insulated against loss by retaining the right to liquidate the collat­
eral before the securities decline in price below the amount of its
contribution*

Conversely, the individual— like a customer who borrows

to purchase securities— puts up only 20 per cent of their cost, is
entitled to the principal portion of any appreciation in their value,
bears the principal risk of loss should that value decline, and does
not stand to gain or lose except through a change in value of the
securities purchased.
(e) The Board is of the opinion that where the right of an
individual to share in profits and losses of such a joint venture is
disproportionate to his contribution to the venture,

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(1) the joint venture involves an extension of credit by the
corporation to the individual,
(2) the extension of credit is to purchase or carry registered
equity securities, and is collateralized by such securities, and
(3) if the corporation is neither a bank subject to Regulation U
nor a broker or dealer subject to Regulation T, the credit is of the kind
described by section 207.1(a) of Regulation G.
(15 U.S.C, 78g,

Interprets or applies 15 U.S.C.

78g.)

Dated at Washington, D. C., this 13th day of May 1969.
By order of the Board of Governors.

(Signed) Robert P. Forrestal

Robert P, Forrestal,
Assistant Secretary,
(SEAL)


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102