Brief Fact Summary. Howey (Defendant) sold small strips of citrus grove to buyers who also signed a service contract for cultivation of said land. The Securities and Exchange Commission (Plaintiff) wanted an injunction prohibiting Howey’s use of interstate commerce to market the contract on the grounds that it established the sale of unregistered securities.
Synopsis of Rule of Law. A â€œsecurityâ€ is a document that provides proof of a monetary investment in a common enterprise with profits earned exclusively through the work of others.
Issue. Is the term security referencing any document(s) that provide evidence of a monetary investment in a common enterprise whose profits come only through the labors of others?
Held. (Murphy, J.) Yes. As defined by Â§ 2(a)(1) of the Act, a â€œsecurityâ€ includes the documents traded for investment or conjecture, having substance over form, regulating the type of a specific document or agreement. Howey is offering an arrangement to invest money in and obtain a portion of the profits of a large citrus fruit operation. Therefore, the documents in this case are representative of shares in the company. The court rejects the court of appeals’ idea that due to the business being unpredictable and promotional in nature, that this deal did not represent the sale of securities. Transference of something with tangible value is not enough to exclude the agreementfrom the 1933 Act. Reversed.
Discussion. This case has been quoted for its defining of the terms â€œinvestment contractsâ€ and â€œsecuritiesâ€. A common enterprise is required to bring a promotional investment deal within the scope of Â§ 5(a). In this case, it is obvious that investors were purchasing the land in order to receive a larger payout down the line without having to do any work. This mirrors the sale of stock.