## Facts

- A nonprofit sponsor developed Co-op City, a large cooperative housing project in the Bronx, under New York’s Mitchell-Lama Act, which provided financing benefits and imposed state supervision and nonprofit operation requirements.
- To obtain an apartment, each tenant had to buy Riverbay Corporation shares (18 shares per room at $25 per share) as a condition of occupancy.
- The shares were tightly restricted: they could not be transferred to nontenants, pledged, or encumbered; voting was one vote per apartment (not proportional to shares); and resale was effectively capped at the original price (with only limited adjustment tied to mortgage amortization) and limited to eligible incoming tenants.
- Residents alleged an early project “Information Bulletin” misrepresented that developers would absorb future cost increases and that monthly charges would remain at projected levels.
- After construction and financing costs increased, tenants faced substantial increases in monthly charges.
- Residents sued under the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, asserting the required share purchases were “securities.”

## Issues

1. Whether the Riverbay shares labeled “stock,” purchased as a condition of obtaining a cooperative apartment, were “securities” under the Securities Act of 1933 and the Securities Exchange Act of 1934.
2. Whether the tenants’ interests qualified as an “investment contract” (or other covered instrument) when the transaction’s primary purpose was acquiring housing rather than earning profits.

## Decision

- The Supreme Court reversed the Second Circuit in a 6–3 decision.
- The Court held the Riverbay shares were not “securities” under the 1933 or 1934 Acts.
- The Court reasoned that the transaction’s economic substance was the purchase of housing for personal use, not an investment for profit.
- The Court concluded the instruments did not qualify as “stock” in the securities-law sense and did not constitute “investment contracts” under the Howey test.

## Legal Principles

- Whether an instrument is a “security” depends on the transaction’s economic reality, not the label attached to the instrument.
- An instrument called “stock” is not treated as stock for federal securities-law purposes if it lacks common stock attributes, including profit-based dividends, negotiability, ability to be pledged, voting power proportional to shares, and capacity to appreciate.
- Under the Howey framework, an “investment contract” requires an investment in a common enterprise with an expectation of profits derived from the efforts of others; a purchase motivated by use or consumption rather than profit is outside federal securities coverage.
- Federal securities laws are aimed at protecting investors in capital-raising and profit-seeking investment contexts and are not a general federal remedy for consumer fraud disputes.

## Conclusion

Because the cooperative share purchase functioned as a regulated, nonprofit mechanism to obtain housing and did not involve a realistic expectation of profit, the required “stock” interests fell outside the statutory definition of a security, and the residents’ federal securities antifraud claims were not cognizable.


United Hous. Found., Inc. v. Forman, 421 U.S. 837 (1975)