The Application of Sec v. W. J. Howey Co. in Colorado and Other Jurisdictions

• Publication year: 2002
• Pages: 73
• Citation: Vol. 31 No. 6 Pg. 73

31 Colo.Law. 73 Colorado Lawyer 2002.

2002, June, Pg. 73. The Application of SEC v. W. J. Howey Co. In Colorado and Other Jurisdictions

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73

Vol. 31, No. 6, Pg. 73

The Colorado Lawyer
June 2002
Vol. 31, No. 6 [Page 73]

Specialty Law Columns
Business Law Newsletter
The Application of SEC v. W. J. Howey Co. In Colorado and Other Jurisdictions
by S. Scott Lasher, Eric B. Liebman

This newsletter is sponsored by the CBA Business Law Section to apprise members of current information concerning substantive law. Subject to author submissions, the newsletter is published eleven times per year, focusing on business law topics for the Colorado practitioner, including but not limited to, issues surrounding anti-trust bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, nonprofit entities, securities law, and small business entities

Column Editors:

David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs - (719) 475-0097; Column Ed. for Bankruptcy Law: Curt Todd, of Lottner, Rubin, Fishman, Brown & Saul, P.C., Denver - (303) 292-1200

About The Authors:

This month's article was written by S. Scott Lasher (not pictured) and Eric B. Liebman, Denver, attorneys at Brega & Winters, P.C., who concentrate in securities matters - (303) 866-9400.

This article describes the case of SEC v. W. J. Howey Co., the seminal U.S. Supreme Court case that defined and gave life to the term "investment contract." The article discusses the application of Howey in the federal circuits and in Colorado.

Not known to many outside the securities field (and quite a few within), attorneys often have argued, and courts have sometimes found, that the definition of an "investment contract" encompasses investment programs involving items as diverse as oranges, enhanced automobile receivables ("EARs"), and live beavers. Unfortunately, the definition under Colorado and federal law of what constitutes an investment contract - a subset of the term "security" - is as diverse across the various jurisdictions as the items and programs it seeks to characterize. This is particularly disturbing because the intensity of securities regulation creates an industry that cries out for certainty. Promoters of programs that are offered in multiple states and jurisdictions deserve a consistent definition of "investment contract" in order to be confident that regardless of where a program is offered, it will be treated the same by regulators, attorneys general, and district attorneys.

The Securities Act of 19331 and the Securities Exchange Act of 19342 ("Securities Acts") require, among many other things, that "securities" must be registered with the Securities and Exchange Commission ("SEC") prior to their sale, or must satisfy some exemption from such registration. It can be intuited that stocks and bonds are the types of instruments falling within the ambit of the Securities Acts.3 More is left to the imagination, however, by the inclusion in the relevant provisions of "investment contracts."4

This article describes the case of SEC v. W. J. Howey Co.,5 the seminal U.S. Supreme Court case that defined and gave life to the term "investment contract." The article reviews the forms that life has taken in the various federal circuit courts and the bit of refinement that the Court offered in its later opinion of United Housing Foundation, Inc. v. Forman.6 Finally, conceding an inability to find a common thread throughout, the article endeavors to describe how "investment contract" is defined in Colorado.

The Case of SEC v.
W. J. Howey Co.

In 1946, the U.S. Supreme Court stated in Howey that the test of an investment contract is "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others."7 Fifty-six years after this seemingly simple statement, the facts and analysis that supported the Howey test of an investment contract still need to be reviewed.

Howey involved two companies located in Florida: the W. J. Howey Company ("Howey Company") and Howey-in-the-Hills Service, Inc. ("Service Company"). The Howey Company owned tracts of land in southern Florida, which it used for growing orange trees. The Service Company was in the business of cultivating and caring for orange groves. The Howey Company and Service Company used the same office space and personnel for their operations.

The Deal: The Howey Company "Investment Contract"

Over several years, the Howey Company sold approximately half of its land in specifically identified tracts to the public to help it finance additional development. On the sale of a tract, the Howey Company made the services of the Service Company available to purchasers, representing to purchasers that it was not economically feasible for them to care for their own tracts of land. The purchasers were not required to use the Service Company; there were other companies in the area available to provide such services. Approximately 15 percent of the purchasers used an outside company. The Service Company also serviced citrus groves not sold by the Howey Company.

The purchase price was based on the size of the tract and the number of years the particular tract had been planted with citrus trees, the price being less for a tract with older trees. The service contract was generally for ten years without the option of cancellation. Purchasers paid the Service Company a fee per acre, based on the age of the trees; again, the fee was less for a tract with older trees. In addition, the purchasers paid certain other specifically defined costs, such as those related to pruning, dusting, spraying, and replacement of dead trees. Those specific costs were accounted for with respect to the individual property for which the costs were incurred. Purchasers were paid the net profits resulting from the sale of the fruit harvested from their tracts. The proceeds from...