In 1946, W. J. Howey Company and Howey-in-the-Hills Service, Inc., corporations under “common control and management”, were deemed responsible by the Securities and Exchange Commission for non—adherence to security laws and regulations. These corporations proposed to vend to the public its citrus grove and did this through agreements that included the proper supervision, picking, and retailing the oranges. However, most of the purchasers the corporations were targeting were inexperienced in the matter of citrus grove care, and thus, lacked the necessary knowledge to care for it themselves; rather, they had invested with these corporations in the hopes of extensive profits. The court case mainly centered on whether the corporations’ sales were sales of securities. This paper will be in defense of the court’s decision of finding W. J. Howey Company and Howey-in-the-Hills Service, Inc.
Not liable for non-obedience to security laws by analyzing the facts, legal procedure, and the court’s decision and reasoning within the case as well as how the case impacted overall business. W. J. Howey Company was in possession of an enormous acreage of citrus groves and sought investors on a regular basis to engage in his business venture. “During the past several years it has panted about 500 acres annually, keeping half of the grove itself and offering the other half to the public”. In fact, the citrus grove had a hotel adjacent to the orange trees, and majority of the purchasers would be patrons of that hotel who were given a scenic picture of the grove. These patrons were usually non-Floridians, and lacked the knowledge to properly care for the orange trees or market them. A representative of Wt Jr Howey Company would give a tour of the citrus grove to these hotel patrons, and if a sign of interest was detected, a sales pitch would be given right then and there.
“The average holding was 1.33 acres and sales of as little as 065, 0.7, and 0.73 of an acre were made” Howey Company would put into effect a land sale contract for a tiny portion of the grove, at Limes even less than an acre, while having the purchasers simultaneously agree to a service contract for the harvesting of their portion of the grove. The service contract that purchasers agreed to Howey Company giving them the assumption that the maintenance of the citrus trees wouldn’t be in decent shape if a service company wasn’t involved, gave. Howey Company the permission to possession of the orange groves that were the purchaser’s, since the purchaser didn‘t partake in any of the harvesting “The service contract, generally of a 10-year duration without the option of cancellation, gives Howey-in-the-Hills Service, Inc, a leasehold interest and ‘full and complete‘ possession of the acreage”.
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When the oranges were picked, the purchaser would get information and data as to the yield amount, but the oranges were sold solely by Howey Company. The company used a diverse number of agencies of interstate commerce when implementing contracts with purchasers, but was unsuccessful in indicating and submitting the contracts and securities with the Securities and Exchange Commission. As a result, the Securities and Exchange Commission requested action against Howey Company for inaugurating sales of unregistered securities, which violates 5(a) of the Securities Act of 1933. Ultimately, however, the District Court decided that the record didn’t establish the existence of an investment contract, stating that there wasn’t a sale of securities, resulting in the Securities and Exchange Commission in requesting certiorari, The Court’s decision was mainly due to the vagueness of the definition of a security and an investment contract under the Securities.
Act of 1933 “The term ‘investment contract‘ is undefined by the Securities Act or by relevant legislative reports”. Howey Company had always offered their service company as a suggestion, and never as a requirement, and moreover, they were accepting of service companies that wasn’t their service company The court also pointed out how purchasers saw the groves prior to the purchase, implicating that they were aware of the state of the grove prior to the purchase, and could’ve decided for themselves if they will need a service company or not. Moreover, of the fifty-one purchases, only forty-two engaged in the services offered by Howey-in-the-Hills Service, Inc Despite the court’s decision, one shouldn‘t ignore the fact that 85% of the acreage sold during the 3-year period ending May 31, 1943, was covered by service contracts with Howey-in-the-Hills Service, Inc.
The issue here lies not within what percentage of investors were involved with the service company, but within the question of whether the term security gives evidence of a monetary investment in a common enterprise who gains earnings only through the means of others’ work and labors As stated by 2 of the Securities Act of 1933, the term security consists of the commonly known documents traded for speculation or investment. Howey was proposing a contract to provide capital for and attain a portion of the profits of its citrus groves Therefore, rather than being a security, these could be considered as Howey Company’s shares. The District Court rejected the Circuit Court of Appeals for the Fifth Circuit’s that an “investment contract is necessarily missing where the enterprise is not speculative or promotional in character and where the tangible interest which is sold has intrinsic value independent of the success of the enterprise as a whole”.
The fact that Howey Company was making it seem that the citrus groves that the investors were purchasing wouldn’t do well without the implementation of a service company isn’t a sufficient enough reason to state they were selling securities, or regulating the contracts that were being made. According to the Court, just because other contracts and agreements may have the appearances of this transaction but are employed as an evasion of the Securities Act of 1933 does not mean that the present contracts were evasive, Rather than a security or an investment contract, the documents agreed upon that’re discussed within this case represent shares of the Howey Company.
The District Court was correct in deciding the innocence of the Howey Company in violating the Securities Act of 1933.‘ This court also assists future judges and courts in defining what these two vague terms are, and as state within Howey Company‘s case, such terms aren‘t definitive but rather are subjective depending on the situations. This court case not only focused on these terms and how they are implemented in the case, but also whether the contracts for the land and the contracts for the management of the property were distinct agreements or simply elements of a single contract. Majority of purchasers and investors desire not to agree to all the elements of an investment contract by evading to the agreement of a service company with the Howey Company, The Securities Act of 1933 illegalizes the sale of unestablished securities.
Thus, it is satisfactory enough that the Howey Company proposes separate investment contracts to suffice for their investors, which should include all the required terms and conditions to make it reasonable and Viable. This case enables one to comprehend that although all securities might be considered as investments, not all investments can be deemed as securities. Also, the case allows one to realize that all the elements and factors that build and make up a security are directly dependent upon the economic and financial connection the issuer has with their investor and/or purchaser. Within Howey Company, all the elements of a profit-seeking business venture were present, but the arrangements being made were representative of the company’s shares, and not the sale of securities.
