U.S. Supreme Court





328 U.S. 293




W. J. HOWEY CO. et al.

No. 843.


Argued May 2, 1946.

Decided May 27, 1946.



 RehearingDenied Oct. 14, 1946


 See 67 S.Ct.27.  [328 U.S.293, 294]    Mr.Roger S. Foster, of Philadelphia, Pa., for petitioner.


 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,  327 U.S. 773 ,66 S.Ct. 821, on a petition alleging that the ruling of the Circuit Court ofAppeals conflicted with other federal and state decisions and that itintroduced a novel and unwarranted test under the statute which the Commissionregarded as administratively impractical.


 Most of thefacts are stipulated. The respondents, W. J. Howey Company andHowey-in-the-Hills Service  [328 U.S.293, 295]    Inc.,are Florida corporations under direct common control and management. The HoweyCompany owns large tracts of citrus acreage in Lake County, Florida. Duringt hepast several years it has planted about 500 acres annually, keeping half of thegroves itself and offering the other half to the public 'to help us financeadditional development.' Howey-in-the-Hills Service, Inc., is a service companyengaged in cultivating and developing many of these groves, including theharvesting and marketing of the crops.


 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.  [328 U.S.293, 296]    Theservice contract, generally of a 10-year duration without option ofcancellation, gives Howey-in-the-Hills Service, Inc., a leasehold interest and'full and complete' possession of the acreage. For a specified fee plus thecost of labor and materials, the company is given full discretion and authorityover 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 largeforce of skilled personnel and a great deal of equipment, including 75tractors, sprayer wagons, fertilizer trucks and the like. Without the consentof the company, the land owner or purchaser has no right of entry to market thecrop;2 thus there is ordinarily no right to specific fruit. The company isaccountable only for an allocation of the net profits based upon a check madeat the time of picking. All the produce is pooled by the respondent companies,which do business under their own names.


 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  [328 U.S.293, 297]    grovesas they are being escorted about the surrounding countryside. They are toldthat the groves are for sale; if they indicate an interest in the matter theyare then given a sales talk.


 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. 3  This definition also includes'securities' of a more variable character, designated by such descriptive termsas 'certificate of interest or participation in any profit-sharing agreement,''investment contract' and 'in general, any interest or instrument commonlyknown as a 'security." The legal issue in this case turns upon adetermination of whether, under the circumstances, the land sales contract, thewarranty deed and the service contract together constitute an 'investmentcontract' within the meaning of 2(1). An affirmative answer brings intooperation the registration requirements of 5(a), unless the security is grantedan exemption under 3(b), 15 U.S.C.A. 77c(b). The lower courts, in reaching anegative answer to this problem, treated the contracts and deeds  [328 U.S.293, 298]    asseparate transactions involving no more than an ordinary real estate sale andan agreement by the seller to manage the property for the buyer.


 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.  4  


 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-  [328 U.S.293, 299]    actionor scheme whereby a person invests his money in a common enterprise and is ledto expect profits solely from the efforts of the promoter or a third party, itbeing immaterial whether the shares in the enterprise are evidenced by formalcertificates or by nominal interests in the physical as ets employed in theenterprise. Such a definition necessarily underlies this Court's decision inSecurities Exch. Commission v. C. M. Joiner Leasing Corp.,  320 U.S. 344 ,64 S.Ct. 120, and has been enunciated and applied many times by lower federalcourts.  5  It permits the fulfillment of thestatutory purpose of compelling full and fair disclosure relative to theissuance of 'the many types of instruments that in our commercial world fallwithin the ordinary concept of a security.' H. Rep.No.85, 73rd Cong., 1stSess., p. 11. It embodies a flexible rather than a static principle, one thatis capable of adaptation to meet the countless and variable schemes devised bythose who seek the use of the money of others on the promise of profits.


 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-  [328 U.S.293, 300]    mentand experience requisite to the cultivation, harvesting and marketing of thecitrus products. Such persons have no desire to occupy the land or to developit themselves; they are attracted solely by the prospects of a return on theirinvestment. Indeed, individual development of the plots of land that areoffered and sold would seldom be economically feasible due to their small size.Such tracts gain utility as citrus groves only when cultivated and developed ascomponent parts of a larger area. A common enterprise managed by respondents orthird parties with adequate personnel and equipment is therefore essential ifthe investors are to achieve their paramount aim of a return on theirinvestments. Their respective shares in this enterprise are evidenced by landsales contracts and warranty deeds, which serve as a convenient method ofdetermining the investors' allocable shares of the profits. The resultingtransfer of rights in land is purely incidental.


 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 [328 U.S.293, 301]    therespondents. The Securities Act prohibits the offer as well as the sale ofunregistered, non-exempt securities. 6  Hence it is enough that the respondentsmerely offer the essential ingredients f an investment contract.


 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,  320 U.S. 352 ,64 S.Ct. 124. The statutory policy of affording broad protection to investorsis not to be thwarted by unrealistic and irrelevant formulae.




 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  [328 U.S.293, 302]    thatis 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 itfound against its existence. 60 F.Supp. 440. The Circuit Court of Appeals forthe Fifth Circuit sustained that finding. 151 F.2d 714. If respect is to bepaid to the wise rule of judicial administration under which this Court doesnot upset concurrent findings of two lower courts in the ascertainment of factsand the relevant inferences to be drawn from them, this case clearly calls forits application. See Allen v. Trust Co. of Georgia,  326 U.S. 630 ,66 S.Ct. 389. For the crucial issue in this case turns on whether the contractsfor the land and the contracts for the management of the property were inreality separate agreements or merely parts of a single transaction. It isclear from its opinion that the District Court was warranted in its conclusionthat the record does not establish the existence of an investment contract:

'... 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.




[ Footnote 1 ]48 Stat. 74, 15 U.S.C. 77b(1), 15 U.S.C.A. 77b(1).


[ Footnote 2 ]Some investors visited their particular plots annually, making suggestions asto 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 anyprofit-sharing agreement, collateral-trust certificate, preorganizationcertificate or subscription, transferable share, investment contract,voting-trust certificate, certificate of deposit for a security, fractionalundivided interest in oil, gas, or other mineral rights, or, in general, anyinterest or instrument commonly known as a 'security,' or any certificate ofinterest or participation in, temporary or interim certificate for, receiptfor, guarantee of, or warrant or right to subscribe to or purchase, any of theforegoing.'


[ Footnote 4 ]State v. Evans, 154 Minn. 95, 191 N.W. 425, 27 A.L.R. 1165; Klatt v. GuaranteedBond 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 PackingCorp., 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, 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., 33F.Supp. 988. The Commission has followed the same definition in its ownadministrative 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, orsolicitation of an offer to buy,' a security for value.