The “Howey” Test Begins – Florida District Court Judge Rules that Citrus Tree Developers and Growers Do Not Have to Register With the Securities and Exchange Commission.

Case Name: Securities and Exchange Commission v. WJ Howey Co.

Court: United States District Court – Southern District of Florida

Date of Opinion: April 17th, 1945

Judge: Dozier A. DeVane

Overview: Plaintiff Securities and Exchange Commission filed suit against a citrus tree developer arguing that the company should have to register with the SEC.

Background:  This case provides the framework for how to determine whether an “Investment Contract” exists.  There has been a lot of discussion as to whether crypto currency is a form of an “investment contract” and the SEC has looked to Howey to determine the outcome.  Whether or not a “digital asset” should be seen as an “investment contract.” depends on numerous factors, such as the investment of money, whether a common enterprise exists, and whether there is a reasonable expectation of profits from the investment of others.  Let’s take a look first at the Howey case.

The “Howey” case centers around the selling of land where citrus trees where Citrus Trees are grown in Lake County, Florida.  The Howry Company has been growing and selling land where the trees are grown for over 20 years. The Howey Company and the Service Company, owned by the same people who own the Howry Company, cultivates and cares for citrus groves sold by the Howry Company, where its services are desired by the purchaser.

A service contract is signed whereas the Service Company maintains, fertilizes, sprays, and otherwise cares for the citrus groves for a specific service charge.  In addition to this service charge, the owner of the land also agrees to pay for pruning, spraying and spray material, fertilizer, and watering the trees if it is deemed necessary. In addition, the Service Company acts as an agent of the land for the marketing of the fruit, if that is wanted by the landowner.

During May of 1943, The Howry Company sold 51 parcels of land which came out to be 195.26 acres of grove property and 42 of these purchasers entered into service contracts with the Service Company. 

The court states that it is common knowledge that caring for citrus groves requires a force that is beyond the means of an owner of a small citrus property and that there are a number of companies in Florida that provide this service.

The plaintiff in this case (The Securities and Exchange Commission) maintains that the activities of both of these companies is a violation of Section 5(a) of the Securities Act of 1933, 15 U.S.C.A. § 77e(a) and that the entries into the contracts constitutes the sale of securities and that the defendants should cease these practices until registration statements have been filed with the proper regulatory agency.

The court opines that not one sale of citrus grove property was made by the Howry company except by purchasers who inspected the property first.  In addition, the judge says that the services offered by the Service Company is more of a guarantee that their properties will be cared for. The judge concludes that the services offered by the Services Company is not in violation of the Securities Act of 1933.

Conclusion:  The court opined that the defendant did not have register statements with the Securities and Exchange Commission and ruled for the defendant.

Steven M. Cohen
Law Librarian | + posts

Steven M. Cohen is a law librarian at a midsize law firm in New York City.  He was the creator of Library Stuff, one of the first library blogs, which lasted over 15 years.  He obtained his MLS from Queens College in 2002.  His passions include legal research, reading novels, and rooting on his favorite sports teams.