U.S. Supreme Court
SECURITIES AND EXCHANGE COMMISSION v. W. J. HOWEYCO., 328 U.S. 293 (1946)
328 U.S. 293
SECURITIES AND EXCHANGE COMMISSION
W. J. HOWEY CO. et al.
Argued May 2, 1946.
Decided May 27, 1946.
RehearingDenied Oct. 14, 1946
See 67 S.Ct.27.
Messrs. C. E.Duncan, of Tavares, Fla., and George C. Bedell, of Jacksonville, Fla., forrespondents.
Mr. JusticeMURPHY delivered the opinion of the Court.
This caseinvolves the application of 2(1) of the Securities Act of 19331 to an offeringof units of a citrus grove development coupled with a contract for cultivating,marketing and remitting the net proceeds to the investor.
The Securitiesand Exchange Commission instituted this action to restrain the respondents fromusing the mails and instrumentalities of interstate commerce in the offer andsale 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. Wegranted certiorari,
Most of thefacts are stipulated. The respondents, W. J. Howey Company andHowey-in-the-Hills Service
Eachprospective customer is offered both a land sales contract and a servicecontract, after having been told that it is not feasible to invest in a groveunless service arrangements are made. While the purchaser is free to makearrangements with other service companies, the superiority ofHowey-in-the-Hills Service, Inc., is stressed. Indeed, 85% of the acreage soldduring the 3-year period ending May 31, 1943, was covered by service contractswith Howey-in-the-Hills Service, Inc.
The land salescontract with the Howey Company provides for a uniform purchase price per acreor fraction thereof, varying in amount only in accordance with the number ofyears the particular plot has been planted with citrus trees. Upon full paymentof 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 acreconsists of a row of 48 trees. During the period between February 1, 1941, andMay 31, 1943, 31 of the 42 persons making purchases bought less than 5 acreseach. The average holding of these 31 persons was 1.33 acres and sales of aslittle as 0.65, 0.7 and 0.73 of an acre were made. These tracts are notseparately fenced and the sole indication of several ownership is found insmall land marks intelligible only through a plat book record.
The purchasersfor the most part are non-residents of Florida. They are predominantly businessand professional people who lack the knowledge, skill and equipment necessaryfor the care and cultivation of citrus trees. They are attracted by theexpectation of substantial profits. It was represented, for example, thatprofits during the 1943-1944 season amounted to 20% and that even greaterprofits 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 thesepurchasers are patrons of a resort hotel owned and operated by the HoweyCompany in a scenic section adjacent to the groves. The hotel's advertisingmentions the fine groves in the vicinity and the attention of the patrons isdrawn to the
It is admittedthat the mails and instrumentalities of interstate commerce are used in thesale of the land and service contracts and that no registration statement orletter of notification has ever been filed with the Commissioni n accordancewith the Securities Act of 1933 and the rules and regulations thereunder.
Section 2(1) ofthe Act defines the term 'security' to include the commonly known documentstraded for speculation or investment.
The term'investment contract' is undefined by the Securities Act or by relevantlegislative reports. But the term was common in many state 'blue sky' laws inexistence prior to the adoption of the federal statute and, although the termwas also undefined by the state laws, it had been broadly construed by statecourts so as to afford the investing public a full measure of protection. Formwas disregarded for substance and emphasis was placed upon economic reality. Aninvestment contract thus came to mean a contract or scheme for 'the placing ofcapital or laying out of money in a way intended to secure income or profitfrom 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 avariety of situations where individuals were led to invest money in a commonenterprise with the expectation that they would earn a profit solely throughthe efforts of the promoter or of some one other than themselves.
By including aninvestment contract within the scope of 2(1) of the Securities Act, Congresswas using a term the meaning of which had been crystallized by this priorjudicial interpretation. It is therefore reasonable to attach that meaning tothe term as used by Congress, especially since such a definition is consistentwith the statutory aims. In other words, an investment contract for purposes ofthe Securities Act means a contract, trans-
Thetransactions in this case clearly involve investment contracts as so defined.The respondent companies are offering something more than fee simple interestsin land, something different from a farm or orchard coupled with managementservices. They are offering an opportunity to contribute money and to share inthe profits of a large citrus fruit enterprise managed and partly owned byrespondents. They are offering this opportunity to persons who reside indistant localities and who lack the equip-
Thus all theelements of a profit-seeking business venture are present here. The investorsprovide the capital and share in the earnings and profits; the promotersmanage, control and operate the enterprise. It follows that the arrangementswhereby the investors' interests are made manifest involve investmentcontracts, regardless of the legal terminology in which such contracts areclothed. The investment contracts in this instance take the form of land salescontracts, warranty deeds and service contracts which respondents offer toprospective investors. And respondents' failure to abide by the statutory andadministrative rules in making such offerings, even though the failure resultfrom a bona fide mistake as to the law, cannot be sanctioned under the Act.
This conclusionis unaffected by the fact that some purchasers choose not to accept the fulloffer of an investment contract by declining to enter into a service contractwith
We reject thesuggestion of the Circuit Court of Appeals, 151 F.2d at page 717, that aninvestment contract is necessarily missing where the enterprise is notspeculative or promotional in character and where the tangible interest whichis sold has intrinsic value independent of the success of the enterprise as awhole. The test is whether the scheme involves an investment of money in acommon enterprise with profits to come solely from the efforts of others. Ifthat test be satisfied, it is immaterial whether the enterprise is speculativeor non-speculative or whether there is a sale of property with or withoutintrinsic value. See S. E.C. v. C. M. Joiner Leasing Corp., supra,
Mr. JusticeJACKSON took no part in the consideration or decision of this case.
Mr. JusticeFRANKFURTER dissenting.
'Investment contract' is not a term of art; it is conceptiondependent upon the circumstances of a particular situation. If this case camebefore 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), 15 U.S.C.A. 77b(1), the Securities and ExchangeCommission's finding would govern, unless, on the record, it was whollyunsupported. But
'... the record in this case shows that not a single sale ofcitrus grove property was made by the Howey Company during the period involvedin this suit, except to purchasers who actually inspected the property beforepurchasing the same. The record further discloses that no purchaser is requiredto engage the Service Company to care for his property and that of thefifty-one purchasers acquiring property during this period, only forty-twoentered into contract with the Service Company for the care of the property.'60 F.Supp. at page 442.
Simply becauseother arrangements may have the appearances of this transaction but areemployed as an evasion of the Securities Act does not mean that the presentcontracts were evasive. I find nothing in the Securities Act to indicate thatCongress meant to bring every innocent transaction within the scope of the Actsimply because a perversion of them is covered by the Act.