Article, 0419 UTBJ, Vol. 32, No. 2. 16
| Author | BRAD R. JACOBSEN AND HUNTER S. REYNOLDS |
| Position | Vol. 32 2 Pg. 16 |
March,
2019
75
Years of Howey: How the Sale of Florida Orange Groves 75
Years Ago Established Securities Law Compliance Standards for
Cryptocurrencies and Other Digital Tokens Today
BRAD
R. JACOBSEN AND HUNTER S. REYNOLDS
Introduction
In
2018, William Hinman, the Director of the Division of
Corporate Finance at the United States Securities and
Exchange Commission, provided significant guidance on the
applicability of U.S. Federal Securities Law to Initial Coin
Offerings (ICO’s) and the sale of digital tokens.
William Hinman, Director, Division of Corporate Finance, U.S.
Securities and Exchange Commission, Address at the Yahoo
Finance All Markets Summit: Digital Asset Transactions: When
Howey Met Gary (Plastic) (June 14, 2018). Director
Hinman confirmed in detail that the SEC will continue to
apply the “Howey Test” in determining whether the
sale of digital tokens amount to the issuance and sale of a
security. Id. (commenting that “calling the
transaction an initial coin offering, or ‘ICO,’
will not take it out of the purview of the U.S. securities
laws”).
Director
Hinman, echoing several speeches by others at the SEC on the
importance of the Howey Test,
• an investment of [value];
• in a common enterprise;
• with an expectation of profit;
• that are derived from the efforts of others
See Hinman, supra note 1; see also SEC
v. W.J. Howey Co., 328 U.S. 293 (1946).
Thus,
offerings that contain these elements will be deemed the sale
of a security under U.S. law and, as such, will be required
to conform to disclosure and compliance laws thereunder (as
well as bring significant civil and criminal liability risk
for failure to comply). See Hinman, supra
note 1. This article will attempt to bridge the gap between
the Supreme Court’s ruling in 1946 and the SEC’s
implementation of that decision as it relates to the sale of
digital tokens and other cryptocurrencies. Section II of this
article will briefly summarize both the history and holdings
of SEC v. W.J. Howey Co. Section III will discuss
Director Hinman’s insights into the SEC’s plans
regarding the regulation of ICO’s.
The
History of Howey
William
J. Howey founded Howey-in-the-Hills, located northwest of
Orlando, Florida, in May 1925. The W.J. Howey Company owned
large tracts of citrus acreage in Howey-in-the-Hills, and
planted roughly 500 acres annually through the 1930s.
Howey’s History, Howey-in-the-Hills,
available at https://howeyhillsfl.govoffice3.
com/index.asp?Type=GALLERY&SEC=%7B331DFD62-65ED-4F65-A4D6-0BB7FF9B2DE2%7D
(last visited February 1, 2019). Mr. Howey also built the
first citrus juice plant in Florida. Id. In the
early 1940s, as a means to produce current income into an
investment cycle with a long lead time, the W.J. Howey
Company began to sell approximately half of the acres that it
developed. See W.J. Howey Co., 328 U.S. at 295.
In May
of 1943, the W.J. Howey Company and Howey-in-the-Hills
Service, Inc. sold a significant number of their tracts in a
suspect transaction. Id. at 296. Each prospective
customer was offered both a land sales contract and a service
contract, after having been told that it was not feasible to
invest in a grove unless service arrangements were made.
Id. at 295. The Supreme Court noted, “[w]hile
the purchaser [was] free to make arrangements with other
service companies, the superiority of Howey-in-the-Hills
Service, Inc., [was] stressed. Indeed, 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.” Id. The Supreme Court further described
the transactions entered into as follows:
The service contract, generally of a 10-year duration without
option of cancellation, gives Howey-in-the-Hills Service,
Inc., a leasehold interest and “full and
complete” possession of that acreage. For a specified
fee plus the cost of labor and materials, the 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...
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