Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946)
Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946)
293
66 S.Ct. 1100
90 L.Ed. 1244
This case involves the application of 2(1) of the Securities Act of 19331 to an
offering of units of a citrus grove development coupled with a contract for
cultivating, marketing and remitting the net proceeds to the investor.
The Securities and Exchange Commission instituted this action to restrain the
respondents from using the mails and instrumentalities of interstate commerce
in the offer and sale of unregistered and nonexempt securities in violation of
5(a) of the Act, 15 U.S.C.A. 77e(a). The District Court denied the injunction,
60 F.Supp. 440, and the Fifth Circuit Court of Appeals affirmed the judgment,
151 F.2d 714. We granted certiorari, 327 U.S. 773, 66 S.Ct. 821, on a petition
alleging that the ruling of the Circuit Court of Appeals conflicted with other
federal and state decisions and that it introduced a novel and unwarranted test
under the statute which the Commission regarded as administratively
impractical.
Most of the facts are stipulated. The respondents, W. J. Howey Company and
Each prospective customer is offered both a land sales contract and a service
contract, after having been told that it is not feasible to invest in a grove unless
service arrangements are made. While the purchaser is free to make
arrangements with other service companies, the superiority of Howey-in-theHills Service, Inc., is stressed. Indeed, 85% of the acreage sold during the 3year period ending May 31, 1943, was covered by service contracts with
Howey-in-the-Hills Service, Inc.
The land sales contract with the Howey Company provides for a uniform
purchase price per acre or fraction thereof, varying in amount only in
accordance with the number of years the particular plot has been planted with
citrus trees. Upon full payment of the purchase price the land is conveyed to
the purchaser by warranty deed. Purchases are usually made in narrow strips of
land arranged so that an acre consists of a row of 48 trees. During the period
between February 1, 1941, and May 31, 1943, 31 of the 42 persons making
purchases bought less than 5 acres each. The average holding of these 31
persons was 1.33 acres and sales of as little as 0.65, 0.7 and 0.73 of an acre
were made. These tracts are not separately fenced and the sole indication of
several ownership is found in small land marks intelligible only through a plat
book record.
The purchasers for the most part are non-residents of Florida. They are
predominantly business and professional people who lack the knowledge, skill
and equipment necessary for the care and cultivation of citrus trees. They are
attracted by the expectation of substantial profits. It was represented, for
example, that profits during the 19431944 season amounted to 20% and that
even greater profits might be expected during the 1944 1945 season, although
only a 10% annual return was to be expected over a 10-year period. Many of
these purchasers are patrons of a resort hotel owned and operated by the Howey
Company in a scenic section adjacent to the groves. The hotel's advertising
mentions the fine groves in the vicinity and the attention of the patrons is
drawn to the groves as they are being escorted about the surrounding
countryside. They are told that the groves are for sale; if they indicate an
interest in the matter they are then given a sales talk.
Section 2(1) of the Act defines the term 'security' to include the commonly
known documents traded for speculation or investment.3 This definition also
includes 'securities' of a more variable character, designated by such descriptive
terms as 'certificate of interest or participation in any profit-sharing agreement,'
'investment contract' and 'in general, any interest or instrument commonly
known as a 'security." 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 2(1). An affirmative answer brings into operation the registration
requirements of 5(a), unless the security is granted an exemption under
3(b), 15 U.S.C.A. 77c(b). The lower courts, in reaching a negative answer to
this problem, treated the contracts and deeds as separate transactions involving
no more than an ordinary real estate sale and an agreement by the seller to
manage the property for the buyer.
10
disregarded for substance and emphasis was placed upon economic reality. 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.' State v. Gopher Tire & Rubber Co., 146 Minn. 52, 56,
177 N.W. 937, 938. This definition was uniformly applied by state courts to a
variety of situations where individuals were led to invest money in a common
enterprise with the expectation that they would earn a profit solely through the
efforts of the promoter or of some one other than themselves.4
11
12
Thus all the elements of a profit-seeking business venture are present here. The
investors provide the capital and share in the earnings and profits; the
promoters manage, control and operate the enterprise. It follows that the
arrangements whereby the investors' interests are made manifest involve
investment contracts, regardless of the legal terminology in which such
contracts are clothed. The investment contracts in this instance take the form of
land sales contracts, warranty deeds and service contracts which respondents
offer to prospective investors. And respondents' failure to abide by the statutory
and administrative rules in making such offerings, even though the failure result
from a bona fide mistake as to the law, cannot be sanctioned under the Act.
14
This conclusion is unaffected by the fact that some purchasers choose not to
accept the full offer of an investment contract by declining to enter into a
service contract with the respondents. The Securities Act prohibits the offer as
well as the sale of unregistered, non-exempt securities.6 Hence it is enough that
the respondents merely offer the essential ingredients f an investment contract.
15
We reject the suggestion of the Circuit Court of Appeals, 151 F.2d at page 717,
that an investment contract is necessarily missing where the enterprise is not
speculative or promotional in character and where the tangible interest which is
sold has intrinsic value independent of the success of the enterprise as a whole.
The test is whether the scheme involves an investment of money in a common
enterprise with profits to come solely from the efforts of others. If that test be
satisfied, it is immaterial whether the enterprise is speculative or nonspeculative or whether there is a sale of property with or without intrinsic value.
See S.E.C. v. C. M. Joiner Leasing Corp., supra, 320 U.S. 352, 64 S.Ct. 124, 88
L.Ed. 88. The statutory policy of affording broad protection to investors is not
to be thwarted by unrealistic and irrelevant formulae.
16
Reversed.
17
18
19
20
'* * * the record in this case shows that not a single sale of citrus grove property
was made by the Howey Company during the period involved in this suit,
except to purchasers who actually inspected the property before purchasing the
same. The record further discloses that no purchaser is required to engage the
Service Company to care for his property and that of the fifty-one purchasers
acquiring property during this period, only forty-two entered into contract with
the Service Company for the care of the property.' 60 F.Supp. at page 442.
21
'The term 'security' means any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profitsharing 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, 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.'
State v. Evans, 154 Minn. 95, 191 N.W. 425, 27 A.L.R. 1165; Klatt v.
Guaranteed Bond Co., 213 Wis. 12, 250 N.W. 825; State v. Health, 199 N.C.
135, 153 S.E. 855, 87 A.L.R. 37; Prohaska v. Hemmer-Miller Development
Co., 256 Ill.App. 331; People v. White, 124 Cal.App. 548, 12 P.2d 1078;
Stevens v. Liberty Packing Corp., 111 N.J.Eq. 61, 161 A. 193. See also Moore
v. Stella, 52 Cal.App.2d 766, 127 P.2d 300.
Atherton v. United States, 9 Cir.,. 128 F.2d 463; Penfield Co. of California v.
S.E. C., 9 Cir., 143 F.2d 746; S.E.C. v. Universal Service Association, 7 Cir.,
106 F.2d 232; S.E.C. v. Crude Oil Corp., 7 Cir., 93 F.2d 844; S.E.C. v. Bailey,
D.C., 41 F.Supp. 647; S.E.C. v. Payne, D.C., 35 F.Supp. 873; S.E.C. v.
Bourbon Sales Corp., D.C., 47 F.Supp. 70; S.E.C. v. Wickham, D.C., 12
F.Supp. 245; S.E.C. v. Timetrust, Inc., D.C., 28 F.Supp. 34; S.E.C. v. Pyne,
D.C., 33 F.Supp. 988. The Commission has followed the same definition in its
own administrative proceedings. In re Natural Resources Corporation, 8 S.E.C.
635.