''Securities and Exchange Commission v. W. J. Howey Co.'', 328 U.S. 293 (1946), was a case in which the
Supreme Court of the United States
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all Federal tribunals in the United States, U.S. federal court cases, and over Stat ...
held that the offer of a land sales and service
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
was an "investment contract" within the meaning of the
Securities Act of 1933
The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and afte ...
() and that the use of the
mail
The mail or post is a system for physically transporting postcards, letter (message), letters, and parcel (package), parcels. A postal service can be private or public, though many governments place restrictions on private systems. Since the mid ...
s and
interstate commerce
The Commerce Clause describes an enumerated power listed in the United States Constitution ( Article I, Section 8, Clause 3). The clause states that the United States Congress shall have power "to regulate Commerce with foreign Nations, and amon ...
in the offer and sale of these
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
was a violation of §5 of the Act, .
[.] It was an important case in determining the general applicability of the
federal securities laws.
The case resulted in a test, known as the Howey test, to determine whether an instrument qualifies as an "investment contract" for the purposes of the Securities Act: "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."
Facts
The
defendant
In court proceedings, a defendant is a person or object who is the party either accused of committing a crime in criminal prosecution or against whom some type of civil relief is being sought in a civil case.
Terminology varies from one juris ...
s, W. J. Howey Co. and Howey-in-the-Hills Service, Inc., were
corporation
A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...
s organized under the laws of the state of
Florida
Florida ( ; ) is a U.S. state, state in the Southeastern United States, Southeastern region of the United States. It borders the Gulf of Mexico to the west, Alabama to the northwest, Georgia (U.S. state), Georgia to the north, the Atlantic ...
.
William John Howey owned large tracts of
citrus
''Citrus'' is a genus of flowering trees and shrubs in the family Rutaceae. Plants in the genus produce citrus fruits, including important crops such as oranges, mandarins, lemons, grapefruits, pomelos, and limes.
''Citrus'' is nativ ...
groves in Florida. Howey kept half of the groves for its own use and sold
real estate contract
A real estate contract is a contract between parties for the purchase and sale, exchange, or other conveyance of real estate. The sale of land is governed by the laws and practices of the jurisdiction in which the land is located. Real estate c ...
s for the other half to finance its future developments. Howey would sell the land for a uniform price per
acre
The acre ( ) is a Unit of measurement, unit of land area used in the Imperial units, British imperial and the United States customary units#Area, United States customary systems. It is traditionally defined as the area of one Chain (unit), ch ...
(or per fraction of an acre for smaller parcels) and convey to the purchaser a
warranty deed
A warranty deed is a type of deed where the grantor (seller) guarantees that they hold clear title to a piece of real estate and has a right to sell it to the grantee (buyer), in contrast to a quitclaim deed, where the seller does not guara ...
upon payment in full of the purchase price.
The purchaser of the land could then lease it back to the service company Howey-in-the-Hills, via a service contract, which would tend to the land, and harvest, pool, and market the produce. The service contract gave Howey-in-the-Hills "full and complete" possession of the land specified in the contract and left no
right of entry
Right of entry refers to one's right to take or resume possession of land, or the right of a person to go onto another's real property without committing trespass. It also refers to a grantor's power to retake real estate from a grantee
A grant ...
or any right to the produce harvested. Purchasers of the land had the option of making other service arrangements, but W. J. Howey, in its advertising materials, stressed the superiority of Howey-in-the-Hills's service.
Howey marketed the land through a
resort
A resort (North American English) is a self-contained commercial establishment that aims to provide most of a vacationer's needs. This includes food, drink, swimming, accommodation, sports, entertainment and shopping, on the premises. A hotel ...
hotel
A hotel is an establishment that provides paid lodging on a short-term basis. Facilities provided inside a hotel room may range from a modest-quality mattress in a small room to large suites with bigger, higher-quality beds, a dresser, a re ...
it owned in the area and promised significant profits in the sales pitch it provided to those who expressed interest in the groves. Most purchasers of the land were not Florida residents or
farmer
A farmer is a person engaged in agriculture, raising living organisms for food or raw materials. The term usually applies to people who do some combination of raising field crops, orchards, vineyards, poultry, or other livestock. A farmer ...
s. Rather, they were business and professional people inexperienced in
agriculture
Agriculture encompasses crop and livestock production, aquaculture, and forestry for food and non-food products. Agriculture was a key factor in the rise of sedentary human civilization, whereby farming of domesticated species created ...
and lacking the skill or equipment to tend to the land by themselves.
Procedural history
Howey had not filed any
registration statement In the United States, a registration statement is a set of documents, including a prospectus, which a company must file with the U.S. Securities and Exchange Commission before it proceeds with a public offering.
As of May 2022, the United States ...
with the
Securities and Exchange Commission
The United States Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market m ...
. The SEC filed
suit
A suit, also called a lounge suit, business suit, dress suit, or formal suit, is a set of clothes comprising a suit jacket and trousers of identical textiles generally worn with a collared dress shirt, necktie, and dress shoes. A skirt su ...
to obtain an
injunction
An injunction is an equitable remedy in the form of a special court order compelling a party to do or refrain from doing certain acts. It was developed by the English courts of equity but its origins go back to Roman law and the equitable rem ...
forbidding the defendants from using the mails and instrumentalities of interstate commerce in the offer and the sale of unregistered and nonexempt securities, in violation of 5(a) of the
Securities Act of 1933
The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and afte ...
. The
denied the injunction, and the
United States Court of Appeals for the Fifth Circuit
The United States Court of Appeals for the Fifth Circuit (in case citations, 5th Cir.) is one of the 13 United States courts of appeals. It has appellate jurisdiction over the U.S. district courts in the following federal judicial districts:
...
affirmed.
The US Supreme Court then granted
certiorari
In law, ''certiorari'' is a court process to seek judicial review of a decision of a lower court or government agency. ''Certiorari'' comes from the name of a prerogative writ in England, issued by a superior court to direct that the recor ...
.
Majority opinion
Justice
Frank Murphy, writing for the majority, identified the major legal issue in this case as whether or not the contracts that Howey was selling (which were basically
leaseback
Leaseback, short for "sale-and-leaseback", is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done fo ...
agreements) constituted an "investment contract" within the meaning of § 2(a)(1) of the Securities Act of 1933. Murphy reasoned that while the term "investment contract" was left undefined by the Act, it had been used in state
blue sky laws to cover a broad array of contracts and other schemes to raise
capital
Capital and its variations may refer to:
Common uses
* Capital city, a municipality of primary status
** Capital region, a metropolitan region containing the capital
** List of national capitals
* Capital letter, an upper-case letter
Econom ...
in a way to secure some
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...
or
profit
Profit may refer to:
Business and law
* Profit (accounting), the difference between the purchase price and the costs of bringing to market
* Profit (economics), normal profit and economic profit
* Profit (real property), a nonpossessory inter ...
from the use thereof. Thus, the Court concluded that Congress had written the term into the statute in recognition of its previously adopted
common law
Common law (also known as judicial precedent, judge-made law, or case law) is the body of law primarily developed through judicial decisions rather than statutes. Although common law may incorporate certain statutes, it is largely based on prece ...
meaning.
Murphy then formulated one of the US Supreme Court's earliest tests to determine whether an instrument qualifies as an "investment contract" for the purposes of the Securities Act (which later came to be referred to as the ''Howey'' test):
"In other words, an investment contract for purposes of the Securities 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."
"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 non-speculative or whether there is a sale of property with or without intrinsic value."
Murphy determined that the contracts in issue met all four prongs of this test and so W. J. Howey could be held liable for violating § 5 of the Securities Act of 1933. Furthermore, Murphy held that the fact that some of the investors chose to use services other than those of Howey-in-the-Hills to tend to the groves was irrelevant because §5 forbids the offer of unregistered securities as well as the sale of them.
Dissenting opinion
Justice
Felix Frankfurter
Felix Frankfurter (November 15, 1882 – February 22, 1965) was an American jurist who served as an Associate Justice of the Supreme Court of the United States from 1939 until 1962, advocating judicial restraint.
Born in Vienna, Frankfurter im ...
wrote a brief
dissenting opinion
A dissenting opinion (or dissent) is an Legal opinion, opinion in a legal case in certain legal systems written by one or more judges expressing disagreement with the majority opinion of the court which gives rise to its judgment.
Dissenting opi ...
. He first suggested the Supreme Court to defer to the findings of both lower courts, particularly the
District Court
District courts are a category of courts which exists in several nations, some call them "small case court" usually as the lowest level of the hierarchy.
These courts generally work under a higher court which exercises control over the lower co ...
, as it was the finder of fact in this case. He also noted that the purchasers were permitted to inspect the land before they bought it, and they were allowed the option of using their own agricultural services.
See also
*
List of United States Supreme Court cases, volume 328
*
William John Howey
References
External links
*
* {{caselaw source
, case = ''Securities and Exchange Commission v. W. J. Howey Co.'', {{ussc, 328, 293, 1946, el=no
, cornell =https://www.law.cornell.edu/supremecourt/text/328/293
, courtlistener =https://www.courtlistener.com/opinion/104302/securities-and-exchange-commission-v-w-j-howey-co/
, findlaw = https://caselaw.findlaw.com/us-supreme-court/328/293.html
, googlescholar = https://scholar.google.com/scholar_case?case=12975052269830471754
, justia =https://supreme.justia.com/cases/federal/us/328/293/case.html
, loc =http://cdn.loc.gov/service/ll/usrep/usrep328/usrep328293/usrep328293.pdf
1946 in United States case law
United States Supreme Court cases
United States Supreme Court cases of the Stone Court
United States securities case law
W. J. Howey Co.
William John Howey