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SEC v. Howey Co. (full text) :: 328 U.S. 293 (1946) :: Justia US Supreme Court Center Log In
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SEC v. Howey Co. 328 U.S. 293 (1946)
U.S. Supreme CourtSEC v. Howey Co., 328 U.S. 293 (1946)Securities and Exchange Commission v. Howey Co.No. 843Argued May 2, 1946Decided May 27, 1946328 U.S. 293CERTIORARI TO THE CIRCUIT COURT OF APPEALS
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.
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.
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 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.
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.
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.
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.
"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: