Section 3. Definition of Terms. - 3.1.

"Securities" are shares, participation or interests in a corporation

or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character. It includes:

(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed

securities;

(b) Investment contracts, certificates of interest or participation in a profit sharing

agreement, certifies of deposit for a future subscription;

(c) Fractional undivided interests in oil, gas or other mineral rights;

(d) Derivatives like option and warrants;

(e) Certificates of assignments, certificates of participation, trust certificates, voting trust

certificates or similar instruments

(f) Proprietary or nonproprietary membership certificates in corporations; and

(g) Other instruments as may in the future be determined by the Commission.

 the ruling of the Circuit Court of Appeals conflicted with other federal and state decisions, and that it
introduced a novel and unwarranted test under the statute which the Commission regarded as
administratively impractical.
SEC v. Howey Co., 328 U.S. 293 (1946)

Most of the facts are stipulated. The respondents, W. J. Howey Company and Howey-in-the-Hills
Decided May 27, 1946 Service, Inc., are Florida corporations under direct common control and management. The Howey
Company owns large tracts of citrus acreage in Lake County, Florida. During the past several years, it
CERTIORARI TO THE CIRCUIT COURT OF APPEALS has planted about 500 acres annually, keeping half of the groves itself and offering the other half to the
public "to help us finance additional development." Howey-in-the-Hills Service, Inc., is a service
company engaged in cultivating and developing many of these groves, including the harvesting and
FOR THE FIFTH CIRCUIT marketing of the crops.

Syllabus Each prospective customer is offered both a land sales contract and a service contract, after having
been told that it is not feasible to invest in a grove unless service arrangements are made. While the
purchaser is free to make arrangements with other service companies, the superiority of Howey-in-the-
1. Upon the facts of this case, an offering of units of a citrus grove development, coupled with a
Hills Service, Inc., is stressed. Indeed, 85% of the acreage sold during the 3-year period ending May
contract for cultivating, marketing, and remitting the net proceeds to the investor, was an offering of an
31, 1943, was covered by service contracts with Howey-in-the-Hills Service, Inc.
"investment contract" within the meaning of that term as used in the provision of 2(1) of the Securities
Act of 1933 defining "security" as including any "investment contract," and was therefore subject to the
registration requirements of the Act. The land sales contract with the Howey Company provides for a uniform purchase price per acre or
fraction thereof, varying in amount only in accordance with the number of years the particular plot has
been planted with citrus trees. Upon full payment of the purchase price, the land is conveyed to the
2. For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract,
purchaser by warranty deed. Purchases are usually made in narrow strips of land arranged so that an
transaction, or scheme whereby a person invests his money in a common enterprise and is led to
acre consists of a row of 48 trees. During the period between February 1, 1941, and May 31, 1943, 31
expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the
of the 42 persons making purchases bought less than 5 acres each. The average holding of these 31
shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical
persons was 1.33 acres, and sales of as little as O.65, O.7 and O.73 of an acre were made. These
assets employed in the enterprise.
tracts are not separately fenced, and the sole indication of several ownership is found in small land
marks intelligible only through a plat book record. The service contract, generally of a 10-year duration
3. The fact that some purchasers, by declining to enter into the service contract, chose not to accept without option of cancellation, gives Howey-in-the-Hills Service, Inc., a leasehold interest and "full and
the offer of the investment contract in its entirety does not require a different result, since the Securities complete" possession of the acreage. For a specified fee plus the cost of labor and materials, the
Act prohibits the offer, as well as the sale, of unregistered nonexempt securities. P. 328 U. S. 300. company is given full discretion and authority over the cultivation of the groves and the harvest and
marketing of the crops. The company is well established in the citrus business, and maintains a large
force of skilled personnel and a great deal of equipment, including 75 tractors, sprayer wagons,
4. The test of whether there is an "investment contract" under the Securities Act is whether the scheme fertilizer trucks, and the like. Without the consent of the company, the landowner or purchaser has no
involves an investment of money in a common enterprise with profits to come solely from the efforts of right of entry to market the crop; [Footnote 2] thus, there is ordinarily no right to specific fruit. The
others; and, if that test be satisfied, it is immaterial whether the enterprise is speculative or company is accountable only for an allocation of the net profits based upon a check made at the time
nonspeculative, or whether there is a sale of property with or without intrinsic value. of picking. All the produce is pooled by the respondent companies, which do business under their own
names.
5. The policy of the Securities Act of affording broad protection to investors is not to be thwarted by
unrealistic and irrelevant formulae. The purchasers, for the most part, are nonresidents of Florida. They are predominantly business and
professional people who lack the knowledge, skill, and equipment necessary for the care and
reversed. cultivation of citrus trees. They are attracted by the expectation of substantial profits. It was
represented, for example, that profits during the 1943-1944 season amounted to 20%, and that even
greater profits might be expected during the 1944-1945 season, although only a 10% annual return
The Securities & Exchange Commission sued in the District Court to enjoin respondents from using the was to be expected over a 10-year period. Many of these purchasers are patrons of a resort hotel
mails and instrumentalities of interstate commerce in the offer and sale of unregistered and nonexempt owned and operated by the Howey Company in a scenic section adjacent to the groves. The hotel's
securities in violation of the Securities Act of 1933. The District Court denied the injunction. The Circuit advertising mentions the fine groves in the vicinity, and the attention of the patrons is drawn to the
Court of Appeals affirmed. This Court granted certiorari. Reversed, groves as they are being escorted about the surrounding countryside. They are told that the groves are
for sale; if they indicate an interest in the matter, they are then given a sales talk.
MR. JUSTICE MURPHY delivered the opinion of the Court.
It is admitted that the mails and instrumentalities of interstate commerce are used in the sale of the
land and service contracts, and that no registration statement or letter of notification has ever been
This case involves the application of 2(1) of the Securities Act of 1933 [Footnote 1] to an offering of
filed with the Commission in accordance with the Securities Act of 1933 and the rules and regulations
units of a citrus grove development, coupled with a contract for cultivating, marketing and remitting the thereunder.
net proceeds to the investor.

Section 2(1) of the Act defines the term "security" to include the commonly known documents traded
The Securities and Exchange Commission instituted this action to restrain the respondents from using for speculation or investment. [Footnote 3] This definition also includes "securities" of a more variable
the mails and instrumentalities of interstate commerce in the offer and sale of unregistered and
character, designated by such descriptive terms as "certificate of interest or participation in any profit-
nonexempt securities in violation of 5(a) of the Act. The District Court denied the injunction, and the sharing agreement," "investment contract," and, "in general, any interest or instrument commonly
Fifth Circuit Court of Appeals affirmed the judgment. We granted certiorari, on a petition alleging that
known as a security.'" The legal issue in this case turns upon a determination of whether, under the Such tracts gain utility as citrus groves only when cultivated and developed as component parts of a
circumstances, the land sales contract, the warranty deed and the service contract together constitute larger area. A common enterprise managed by respondents or third parties with adequate personnel
an "investment contract" within the meaning of 2(1). An affirmative answer brings into operation the and equipment is therefore essential if the investors are to achieve their paramount aim of a return on
registration requirements of 5(a), unless the security is granted an exemption under 3(b). The lower their investments. Their respective shares in this enterprise are evidenced by land sales contracts and
as separate transactions involving no more than an ordinary real estate sale and an agreement by the warranty deeds, which serve as a convenient method of determining the investors' allocable shares of
seller to manage the property for the buyer. the profits. The resulting transfer of rights in land is purely incidental.

The term "investment contract" is undefined by the Securities Act or by relevant legislative reports. But Thus, all the elements of a profit-seeking business venture are present here. The investors provide the
the term was common in many state "blue sky" laws in existence prior to the adoption of the federal capital and share in the earnings and profits; the promoters manage, control, and operate the
statute, and, although the term was also undefined by the state laws, it had been broadly construed by enterprise. It follows that the arrangements whereby the investors' interests are made manifest involve
state courts so as to afford the investing public a full measure of protection. Form was disregarded for investment contracts, regardless of the legal terminology in which such contracts are clothed. The
substance, and emphasis was placed upon economic reality. An investment contract thus came to investment contracts in this instance take the form of land sales contracts, warranty deeds, and service
mean a contract or scheme for "the placing of capital or laying out of money in a way intended to contracts which respondents offer to prospective investors. And respondents' failure to abide by the
secure income or profit from its employment." This definition was uniformly applied by state courts to a statutory and administrative rules in making such offerings, even though the failure result from a bona
variety of situations where individuals were led to invest money in a common enterprise with the fide mistake as to the law, cannot be sanctioned under the Act.
expectation that they would earn a profit solely through the efforts of the promoter or of some one other
than themselves.
This conclusion is unaffected by the fact that some purchasers choose not to accept the full offer of an
investment contract by declining to enter into a service contract with the respondents. The Securities
By including an investment contract within the scope of 2(1) of the Securities Act, Congress was Act prohibits the offer, as well as the sale, of unregistered, nonexempt securities. [ Footnote 6] Hence, it
using a term the meaning of which had been crystalized by this prior judicial interpretation. It is is enough that the respondents merely offer the essential ingredients of an investment contract.
therefore reasonable to attach that meaning to the term as used by Congress, especially since such a
definition is consistent with the statutory aims. In other words, an investment contract, for purposes of
the Securities Act, means a contract, transaction or scheme whereby a person invests his money in a We reject the suggestion of the Circuit Court of Appeals, that an investment contract is necessarily
common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it missing where the enterprise is not speculative or promotional in character and where the tangible
being immaterial whether the shares in the enterprise are evidenced by formal certificates or by interest which is sold has intrinsic value independent of the success of the enterprise as a whole. The
nominal interests in the physical assets employed in the enterprise. Such a definition necessarily test is whether the scheme involves an investment of money in a common enterprise with profits to
underlies this Court's decision in SEC v. Joiner Corp., and has been enunciated and applied many come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is
times by lower federal courts. It permits the fulfillment of the statutory purpose of compelling full and speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value. The
fair disclosure relative to the issuance of "the many types of instruments that, in our commercial world, statutory policy of affording broad protection to investors is not to be thwarted by unrealistic and
fall within the ordinary concept of a security." It embodies a flexible, rather than a static, principle, one irrelevant formulae.
that is capable of adaptation to meet the countless and variable schemes devised by those who seek
the use of the money of others on the promise of profits. Reversed.

The transactions in this case clearly involve investment contracts, as so defined. The respondent Footnote 3 "The term 'security' means any note, stock, treasury stock, bond, debenture, evidence of
companies are offering something more than fee simple interests in land, something different from a indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust
farm or orchard coupled with management services. They are offering an opportunity to contribute
certificate, pre-organization certificate or subscription, transferable share, investment contract, voting
money and to share in the profits of a large citrus fruit enterprise managed and partly owned by
respondents. They are offering this opportunity to persons who reside in distant localities and who lack trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other
the equipment and experience requisite to the cultivation, harvesting, and marketing of the citrus mineral rights, or, in general, any interest or instrument commonly known as a 'security,' or any
products. Such persons have no desire to occupy the land, or to develop it themselves; they are certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or
attracted solely by the prospects of a return on their investment. Indeed, individual development of the warrant or right to subscribe to or purchase, any of the foregoing."
plots of land that are offered and sold would seldom be economically feasible, due to their small size.