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

May 27,
1946)

Brief Fact Summary.

Howey (Defendant) sold small strips of citrus grove to buyers who also signed a service contract
for cultivation of said land. The Securities and Exchange Commission (Plaintiff) wanted an
injunction prohibiting Howey’s use of interstate commerce to market the contract on the grounds
that it established the sale of unregistered securities.

Synopsis of Rule of Law.

A security is a document that provides proof of a monetary investment in a common enterprise
with profits earned exclusively through the work of others.

Facts.
Howey owned a large citrus grove and solicited investors to participate in his business venture.
Howey would implement a land sale contract for a small portion of the grove to the investor
while also having them enter into a service contract for cultivation of that land. The service
contract granted Howey the complete right to possession due to the investor not taking part in
cultivation of any sort. Once harvested, the investor would get an account for the produce
yielded by the strip they invested in, however the fruit was marketed exclusively by Howey.
Howey utilized various agencies of interstate commerce when endorsing this arrangement but
failed to register the contracts and securities with the SEC. This led to the SEC bringing an
action seeking an injunction against the use of interstate commerce on the grounds that Howey
established sales of unregistered securities, violating § 5(a) of Securities Act of 1933. Trial
court denied the injunction, saying that the contract arrangement did not provide sales of
securities. The court of appeals affirmed. The SEC sought certiorari.

Issue.
Is the term security referencing any document(s) that provide evidence of a monetary investment
in a common enterprise whose profits come only through the labors of others?

Held.
(Murphy, J.) Yes. As defined by § 2(a)(1) of the Act, a security includes the documents traded
for investment or conjecture, having substance over form, regulating the type of a specific
document or agreement. Howey is offering an arrangement to invest money in and obtain a
portion of the profits of a large citrus fruit operation. Therefore, the documents in this case are
representative of shares in the company. The court rejects the court of appeals’ idea that due to
the business being unpredictable and promotional in nature, that this deal did not represent the
sale of securities. Transference of something with tangible value is not enough to exclude the
agreement from the 1933 Act. Reversed.

Discussion.
This case has been quoted for its defining of the terms investment contracts and securities. A
common enterprise is required to bring a promotional investment deal within the scope of §
5(a). In this case, it is obvious that investors were purchasing the land in order to receive a larger
payout down the line without having to do any work. This mirrors the sale of stock.

U.S. Supreme Court

SEC v. Howey Co., 328 U.S. 293 (1946)Securities and Exchange Commission v.
Howey Co.
No. 843
Argued May 2, 1946
Decided May 27, 1946
328 U.S. 293
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Syllabus
1. Upon the facts of this case, an offering of units of a citrus grove development,
coupled with a contract for cultivating, marketing, and remitting the net proceeds to
the investor, was an offering of an "investment contract" within the meaning of that
term as used in the provision of § 2(1) of the Securities Act of 1933 defining
"security" as including any "investment contract," and was therefore subject to the
registration requirements of the Act. Pp. 328 U. S. 294-297, 328 U. S. 299.
2. For purposes of the Securities Act, an investment contract (undefined by the Act)
means a contract, transaction, or scheme whereby a person invests his money in a
common enterprise and is led to expect profits solely from the efforts of the
promoter or a third party, it being immaterial whether the shares in the enterprise
are evidenced by formal certificates or by nominal interests in the physical assets
employed in the enterprise. Pp. 328 U. S. 298-299.
3. The fact that some purchasers, by declining to enter into the service contract,
chose not to accept the offer of the investment contract in its entirety does not
require a different result, since the Securities Act prohibits the offer, as well as the
sale, of unregistered nonexempt securities. P. 328 U. S. 300.
4. The test of whether there is an "investment contract" under the Securities Act is
whether the scheme involves an investment of money in a common enterprise with
profits to come solely from the efforts of others; and, 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. P. 328 U. S. 301.
5. The policy of the Securities Act of affording broad protection to investors is not to
be thwarted by unrealistic and irrelevant formulae. P. 328 U. S. 301.
151 F.2d 714 reversed.
The Securities & Exchange Commission sued in the District Court to enjoin
respondents from using the mails and instrumentalities of interstate commerce in
the offer
Page 328 U. S. 294
and sale of unregistered and nonexempt securities in violation of the Securities Act
of 1933. The District Court denied the injunction. 60 F. Supp. 440. The Circuit Court
of Appeals affirmed. 151 F.2d 714. This Court granted certiorari. 327 U.S.
773. Reversed, p. 328 U. S. 301.
MR. JUSTICE MURPHY delivered the opinion of the Court.
This case involves the application of § 2(1) of the Securities Act of 1933 [Footnote 1]
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. 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, 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
Howey-in-the-Hills Service,
Page 328 U. S. 295
Inc., are Florida corporations under direct common control and management. The
Howey Company owns large tracts of citrus acreage in Lake County, Florida. During
the past several years, it has planted about 500 acres annually, keeping half of the
groves itself and offering the other half to the public "to help us finance additional
development." Howey-in-the-Hills Service, Inc., is a service company engaged in
cultivating and developing many of these groves, including the harvesting and
marketing of the crops.
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-the-Hills Service, Inc., is
stressed. Indeed, 85% of the acreage sold during the 3-year 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
O.65, O.7 and O.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.
Page 328 U. S. 296
The service contract, generally of a 10-year duration without option of cancellation,
gives Howey-in-the-Hills Service, Inc., a leasehold interest and "full and complete"
possession of the acreage. For a specified fee plus the cost of labor and materials,
the company is given full discretion and authority over the cultivation of the groves
and the harvest and marketing of the crops. The company is well established in the
citrus business, and maintains a large force of skilled personnel and a great deal of
equipment, including 75 tractors, sprayer wagons, fertilizer trucks, and the like.
Without the consent of the company, the landowner or purchaser has no right of
entry to market the crop; [Footnote 2] thus, there is ordinarily no right to specific
fruit. The company is accountable only for an allocation of the net profits based
upon a check made at the time of picking. All the produce is pooled by the
respondent companies, which do business under their own names.
The purchasers, for the most part, are nonresidents 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 1943-1944 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
Page 328 U. S. 297
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.
It is admitted that the mails and instrumentalities of interstate commerce are used
in the sale of the land and service contracts, and that no registration statement or
letter of notification has ever been filed with the Commission in accordance with
the Securities Act of 1933 and the rules and regulations thereunder.
Section 2(1) of the Act defines the term "security" to include the commonly known
documents traded for speculation or investment. [Footnote 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). The lower courts, in reaching a
negative answer to this problem, treated the contracts and deeds
Page 328 U. S. 298
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.
The term "investment contract" is undefined by the Securities Act or by relevant
legislative reports. But the term was common in many state "blue sky" laws in
existence prior to the adoption of the federal statute, and, although the term was
also undefined by the state laws, it had been broadly construed by state courts so
as to afford the investing public a full measure of protection. Form was 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. [Footnote 4]
By including an investment contract within the scope of § 2(1) of the Securities Act,
Congress was using a term the meaning of which had been crystalized by this prior
judicial interpretation. It is therefore reasonable to attach that meaning to the term
as used by Congress, especially since such a definition is consistent with the
statutory aims. In other words, an investment contract, for purposes of the
Securities Act, means a contract, transaction
Page 328 U. S. 299
or scheme whereby a person invests his money in a common enterprise and is led
to expect profits solely from the efforts of the promoter or a third party, it being
immaterial whether the shares in the enterprise are evidenced by formal
certificates or by nominal interests in the physical assets employed in the
enterprise. Such a definition necessarily underlies this Court's decision in SEC v.
Joiner Corp., 320 U. S. 344, and has been enunciated and applied many times by
lower federal courts. [Footnote 5] It permits the fulfillment of the statutory purpose
of compelling full and fair disclosure relative to the issuance of "the many types of
instruments that, in our commercial world, fall within the ordinary concept of a
security." H.Rep. No.85, 73rd Cong., 1st Sess., p. 11. It embodies a flexible, rather
than a static, principle, one that is capable of adaptation to meet the countless and
variable schemes devised by those who seek the use of the money of others on the
promise of profits.
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. They are offering an opportunity to contribute money and to share in the
profits of a large citrus fruit enterprise managed and partly owned by respondents.
They are offering this opportunity to persons who reside in distant localities and
who lack the equipment
Page 328 U. S. 300
and experience requisite to the cultivation, harvesting, and marketing of the citrus
products. Such persons have no desire to occupy the land, or to develop it
themselves; they are attracted solely by the prospects of a return on their
investment. Indeed, individual development of the plots of land that are offered
and sold would seldom be economically feasible, due to their small size. Such tracts
gain utility as citrus groves only when cultivated and developed as component parts
of a larger area. A common enterprise managed by respondents or third parties
with adequate personnel and equipment is therefore essential if the investors are
to achieve their paramount aim of a return on their investments. Their respective
shares in this enterprise are evidenced by land sales contracts and warranty deeds,
which serve as a convenient method of determining the investors' allocable shares
of the profits. The resulting transfer of rights in land is purely incidental.
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.
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
Page 328 U. S. 301
the respondents. The Securities Act prohibits the offer, as well as the sale, of
unregistered, nonexempt securities. [Footnote 6] Hence, it is enough that the
respondents merely offer the essential ingredients of an investment contract.
We reject the suggestion of the Circuit Court of Appeals, 151 F.2d at 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 SEC v. Joiner Corp.,
supra, 320 U. S. 352. The statutory policy of affording broad protection to investors
is not to be thwarted by unrealistic and irrelevant formulae.
Reversed.
MR. JUSTICE JACKSON took no part in the consideration or decision of this case.
[Footnote 1]
48 Stat. 74, 15 U.S.C. § 77b(1).
[Footnote 2]
Some investors visited their particular plots annually, making suggestions as to care
and cultivation, but without any legal rights in the matters.
[Footnote 3]
"The term 'security' means any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit-
sharing agreement, collateral trust certificate, pre-organization 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."
[Footnote 4]
State v. Evans, 154 Minn. 95, 191 N.W. 425; Klatt v. Guaranteed Bond Co., 213 Wis. 12,
250 N.W. 825; State v. Health, 199 N.C. 135, 153 S.E. 855; 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.
[Footnote 5]
Atherton v. United States, 128 F.2d 463; Penfield Co. v. SEC, 143 F.2d 746; SEC v.
Universal Service Assn., 106 F.2d 232; SEC v. Crude Oil Corp., 93 F.2d 844; SEC v.
Bailey, 41 F. Supp. 647; SEC v. Payne, 35 F. Supp. 873; SEC v. Bourbon Sales Corp., 47 F.
Supp. 70; SEC v. Wickham, 12 F. Supp. 245; SEC v. Timetrust, Inc., 28 F. Supp. 34; SEC v.
Pyne, 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.
[Footnote 6]
The registration requirements of § 5 refer to sales of securities. Section 2(3) defines
"sale" to include every "attempt or offer to dispose of, or solicitation of an offer to
buy," a security for value.
MR. JUSTICE FRANKFURTER dissenting.
"Investment contract" is not a term of art; it is conception dependent upon the
circumstances of a particular situation. If this case came before us on a finding
authorized by Congress that the facts disclosed an "investment contract" within the
general scope of § 2(1) of the Securities Act, 48 Stat. 74, 15 U.S.C. § 77b(1), the
Securities and Exchange Commission's finding would govern unless, on the record,
it was wholly unsupported. But
Page 328 U. S. 302
that is not the case before us. Here, the ascertainment of the existence of an
"investment contract" had to be made independently by the District Court, and it
found against its existence. 60 F. Supp. 440. The Circuit Court of Appeals for the
Fifth Circuit sustained that finding. 151 F.2d 714. If respect is to be paid to the wise
rule of judicial administration under which this Court does not upset concurrent
findings of two lower courts in the ascertainment of facts and the relevant
inferences to be drawn from them, this case clearly calls for its application. See Allen
v. Trust Co. of Georgia, 326 U. S. 630. For the crucial issue in this case turns on
whether the contracts for the land and the contracts for the management of the
property were, in reality, separate agreements, or merely parts of a single
transaction. It is clear from its opinion that the District Court was warranted in its
conclusion that the record does not establish the existence of an investment
contract:
". . . 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 442.
Simply because other arrangements may have the appearances of this transaction,
but are employed as an evasion of the Securities Act, does not mean that the
present contracts were evasive. I find nothing in the Securities Act to indicate that
Congress meant to bring every innocent transaction within the scope of the Act
simply because a perversion of them is covered by the Act.