SEC v. W. J. Howey Co.

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Securities and Exchange Commission v. W. J. Howey Co.
Seal of the United States Supreme Court.svg
Argued May 2, 1946
Decided May 27, 1946
Full case name Securities and Exchange Commission v. W. J. Howey Co. et al.
Citations 328 U.S. 293 (more)
66 S.Ct. 1100, 90 L.Ed. 1244, 1946 U.S. LEXIS 3159; 163 A.L.R. 1043
Prior history U.S. District Court for the Southern District of Florida denied injunction, 60 F.Supp. 440, Fifth Circuit Court of Appeals affirmed, 151 F.2d 714, certiorari granted, 327 U.S. 773 , 66 S.Ct. 821
Subsequent history Rehearing Denied October 14, 1946
An "investment contract" under the Securities Act of 1933 is one which involves an investment of money due to an expectation of profits arising from a common enterprise which depends solely on the efforts of a promoter or third party.
Court membership
Case opinions
Majority Murphy, joined by Stone, Black, Reed, Douglas, Burton, Rutledge
Dissent Frankfurter
Jackson took no part in the consideration or decision of the case.
Laws applied
Securities Act of 1933

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 held that the offer of a land sales and service contract was an "investment contract" within the meaning of the Securities Act of 1933, 15 U.S.C. § 77b, and that the use of the mails and interstate commerce in the offer and sale of these securities was a violation of §5 of the Act, 15 U.S.C. § 77e. It was an important case in determining the general applicability of the federal securities laws.

Facts and Procedural History[edit]

The defendants, W. J. Howey Co. and Howey-in-the-Hills Service, Inc., were corporations organized under the laws of the state of Florida. W. J. Howey owned large tracts of citrus groves in Florida. Howey kept half of the groves for its own use, and sold real estate contracts for the other half to finance its future developments. Howey would sell the land for a uniform price per acre (or per fraction of an acre for smaller parcels), and convey to the purchaser a warranty deed 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, who 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, leaving no right of entry nor 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' service.

Howey marketed the land through a resort hotel it owned in the area, promising significant profits in the sales pitch it provided to those parties who expressed interest in the groves. Most of the purchasers of the land were not Florida residents, nor were they farmers. Rather they were business and professional people who were inexperienced in agriculture and lacked the skill or equipment to tend to the land by themselves. Howey had not filed any registration statement with the Securities and Exchange Commission. The SEC filed suit to obtain an injunction forbidding the defendants 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 Securities Act of 1933. The United States District Court for the Southern District of Florida denied the injunction, and the United States Court of Appeals for the Fifth Circuit affirmed. The U.S. Supreme Court then granted certiorari.

Majority Opinion[edit]

Justice Murphy, writing for the majority, identified the major legal issue in this case as whether or not the contracts Howey was selling (which in substance were basically leaseback 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 in a way to secure some income or profit from the use thereof. Thus, the Court concluded, Congress had written the term into the statute in recognition of its previously adopted common law meaning.

Murphy then formulated one of the U.S. 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):

  1. investment of money due to
  2. an expectation of profits arising from
  3. a common enterprise
  4. which depends solely on the efforts of a promoter or third party

Murphy determined that the contracts in issue here met all four prongs of this test, and thus 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.


Justice Frankfurter wrote a brief dissenting opinion. He first suggested that the Supreme Court defer to the findings of both lower courts, particularly the District Court, as it was the finder of fact in this case. He also noted that the purchasers in this case were permitted to inspect the land before they bought it, and were allowed the option of using their own agricultural services.

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