Question

The W.J. Howey Co. owned a large citrus grove in Florida. The citrus grove was serviced by Howey-in- the-Hills, Inc., a corporation owned and operated by the same people who ran the Howey Co. When the Howey Co. needed money, it sold tracts of land in the grove. Each buyer had to purchase both land from the Howey Co. and a service contract from Howey-in-the-Hills. The purchasers had no right to enter the land or to market the crop. All cultivating and marketing was done by the service company. Most of the buyers were from out of state. In return for their purchase, they received a share of the profits after the crops were harvested and sold. The SEC brought suit against both companies, arguing that the land and service contracts were actually securities that should have been registered with the commission. Was the SEC correct? Explain. [See: Securities and Exchange Commission v. W.J. Howey Co., 66 S.Ct. 1100 (U.S. Sup. Ct.).]

Answer 1

The Securities Exchange Act is aimed at protecting the business investors interests by making by ensuring that they are adequately informed about the securities they intend to purchase. A security in simple terminology can be defined as a monetary investment expecting returns based on the efforts of another person. The Securities Exchange Commission is a sole body which regulates the issuance of the securities by the companies and the partnerships and the Securities Act of 1993 is the legislation which regulates the same.

As per the regulations of the Securities Exchange Act of 1993, a corporation is required to file a registration statement and a prospectus with the Securities Exchange Commission when such a corporation offers the securities through the medium of mail or through interstate or foreign commerce. Such registration statement contains the information with respect to the capitalization, financial conditions and management of the corporation. Prospectus also contains the same information, however in a simpler and condensed form. A registration statement is filed for the scrutiny of the experts of the SEC while a prospectus is filed for the potential investors.

As per the facts of the present case, WH was a corporate that owned a large citrus grove and the citrus grove was managed and operated by HH corporation which was owned by the same shareholders as WH. Due to financial needs of WH, it sold the tracts of the groves of land to the buyers. The buyers had to purchase land from WH and a service contract from HH. T

The buyers were not allowed to enter the land, the maintenance and the cultivation of the land was managed by the service company. In return of their purchase they received profits from the harvested crops, most of the purchasers were outsiders. The securities exchange commission filed a suit against the corporation on the grounds that the land and the service contract were securities and should be duly registered with the commission.

The court in this abovementioned case of Securities and Exchange Commission v W. J Howey 66 S.Ct 1100 observed that, as per section 2(1) if the Act, securities mean trading of commonly known documents in exchange of speculation and investment. In this particular case the company offered the investors a chance to share the profits of the harvest of the land, such an offer is more than mere fees in exchange of purchasing land, and such an opportunity is provided to individuals who reside in different and distant localities and lacking the means and expertise to cultivate and rea[p the profits.

The coinventors therefore provide capital and share and the promoters manage, control and operate the enterprise as per a tradition profit seeking venture. The same elements are present in the present case arrangement. The simple test laid down by the court in this case is to determine whether an investment in an enterprise provides profits on the basis of efforts of another. In this case henceforth it can be concluded that the arrangement between the purchasers and the corporation falls under the meaning of securities.