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Keywords

contractcorporationcompliancerespondent
contractcorporationcompliancerespondent

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S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244, 163 A.L.R. 1043

Facts

The respondents, W. J. Howey Company and Howey-in-the-Hills Service, Inc., are Florida corporations that manage citrus groves. They sold land sales contracts and service contracts to investors, who were primarily non-residents lacking the expertise to cultivate citrus trees. The service contracts gave the service company control over the cultivation and marketing of the crops, while the land sales contracts allowed for the purchase of small plots of land. The SEC argued that these arrangements constituted unregistered securities under the Securities Act.

Most of the facts are stipulated. The respondents, W. J. Howey Company and Howey-in-the-Hills Service Inc., are Florida corporations under direct common control and management.

Issue

The main legal issue was whether the land sales contracts and service contracts constituted an 'investment contract' under Section 2(1) of the Securities Act of 1933.

The legal issue in this case turns upon a determination of whether, under the circumstances, the land sales contract, the warranty deed and the service contract together constitute an ‘investment contract’ within the meaning of s 2(1).

Rule

An investment contract is defined as a contract, transaction, or scheme whereby a person invests money in a common enterprise and expects profits solely from the efforts of the promoter or a third party.

An investment contract thus came to mean a contract or scheme for ‘the placing of capital or laying out of money in a way intended to secure income or profit from its employment.’

Analysis

The court analyzed the nature of the contracts and determined that they involved an investment of money in a common enterprise, with profits expected solely from the efforts of the respondents. The court emphasized that the investors were not engaged in the cultivation of the land themselves and were attracted solely by the potential profits from the citrus enterprise managed by the respondents. Thus, the court concluded that the arrangements constituted investment contracts.

The transactions in this case clearly involve investment contracts as so defined. The respondent companies are offering something more than fee simple interests in land, something different from a farm or orchard coupled with management services.

Conclusion

The Supreme Court reversed the lower court's decision, holding that the contracts in question were indeed investment contracts subject to the registration requirements of the Securities Act.

Reversed.

Who won?

The Securities and Exchange Commission prevailed in the case, as the Supreme Court found that the contracts constituted investment contracts, thus requiring compliance with the Securities Act.

The Securities and Exchange Commission prevailed in the case, as the Supreme Court found that the contracts constituted investment contracts, thus requiring compliance with the Securities Act.

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