Thursday, November 7, 2013

Securities and Exchange Commission v. W. J. Howey Co. case brief

Securities and Exchange Commission v. W. J. Howey Co. case brief summary
328 U.S. 293 (1946)

Petitioner Securities and Exchange Commission (SEC) sought certiorari review of a judgment from the United States Court of Appeals for the Fifth Circuit, which affirmed the district court's denial of the SEC's request for an injunction against respondents for alleged violations of Securities Act of 1933, 15 U.S.C.S. § 77b(1). At issue was whether certain transactions constituted "investment contracts" within the meaning of the Act.

In its petition for certiorari review, the SEC challenged the denial of its request for an injunction in the SEC's action alleging violations of § 5(a) of the Securities Act of 1933.

  • The Court reviewed the record, which indicated that respondents, two corporations under direct common control and management, had engaged in transactions which constituted investment contracts within the meaning of the Act, 15 U.S.C.S. § 77b(1). 
  • An investment contract, for purposes of the Act, meant a contract, transaction, or scheme whereby a person invested his money in a common enterprise and was led to expect profits solely from the efforts of the promoter or a third party. 
  • It was immaterial whether the shares in the enterprise were evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. 
  • In the case before the Court, all the elements of a profit-seeking business venture were present. Investors provided the capital and shared in the earnings and profits; respondents managed, controlled, and operated the enterprise. 
  • Because respondents failed to abide by the statutory and administrative rules in making their offerings, they violated the Act.

The Court reversed a judgment affirming dismissal of petitioner's action, brought to restrain respondents from the offer and sale of unregistered and non-exempt securities, in violation of federal securities laws. The transactions complained of were "investment contracts" within the meaning of the Securities Act of 1933, even though they were not evidenced by formal certificates.

Suggested Study Aids For Securities Regulation Law
Securities Regulation in a Nutshell, 10th (Nutshell Series)
Securities Regulation: Examples & Explanations, 5th Edition
Securities Regulations: The Essentials

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