## Facts

- W. J. Howey Company, a Florida corporation, owned large citrus groves and sold small acreage parcels to the public to finance further development.
- Buyers were offered (1) a land sales contract conveying title by deed upon full payment and (2) a separate service contract with a related corporation, Howey-in-the-Hills Service, Inc., under common control.
- Under the service contract, the service company took full possession, cultivated and harvested the citrus, pooled production, marketed the crop, and remitted net proceeds to purchasers.
- Marketing emphasized that purchasing a grove was not feasible without service arrangements and highlighted the service company’s management; most purchasers entered the service contracts.
- Purchasers were generally nonresidents lacking citrus-growing experience and did not intend to occupy or personally develop the land, functioning instead as passive participants expecting a share of pooled profits.
- The SEC alleged the combined offering was an unregistered, nonexempt “investment contract” and therefore a “security” under § 2(1) of the Securities Act of 1933; using the mails or interstate commerce to offer or sell it violated § 5(a).
- The district court denied the SEC’s request for an injunction, and the Fifth Circuit affirmed, concluding the transactions were not securities.

## Issues

1. Whether the offering of citrus grove units coupled with a service contract to cultivate, market, and remit proceeds constituted an “investment contract” and thus a “security” under § 2(1) of the Securities Act of 1933.
2. Whether the presence of some purchasers who declined the service contract prevented the SEC from treating the overall offering as an investment contract subject to registration.

## Decision

- The Supreme Court reversed the Fifth Circuit and held the arrangement was an “investment contract” under § 2(1) and therefore a “security” subject to the Act’s registration requirements.
- The Court stated that an investment contract exists when a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
- The Court held it was immaterial that the interests were framed as real estate transactions or nominal interests in physical assets rather than formal certificates.
- The Court rejected the argument that opt-out purchasers changed the result, noting the Act prohibits the offer as well as the sale of unregistered, nonexempt securities.

## Legal Principles

- “Investment contract” is construed functionally to capture varied schemes using others’ money on promises of profits, consistent with the Securities Act’s investor-protection purpose.
- The existence of an investment contract turns on economic reality: investment of money, a common enterprise, and expected profits derived solely from the efforts of others.
- Formal labels and the presence of property conveyances do not remove a transaction from the securities laws when the purchaser’s expected return depends on managerial or entrepreneurial efforts of the promoter or a third party.
- The securities laws reach the offering of a security even if some purchasers decline to participate in ancillary arrangements that complete the investment scheme.

## Conclusion

The Court held that the citrus-grove land-and-service arrangement was an unregistered investment contract within the Securities Act and established the governing standard for identifying investment contracts: an investment of money in a common enterprise with profits expected solely from others’ efforts.


SEC v. W. J. Howey Co., 328 U.S. 293 (1946)