Howey Test to Determine if an Investment is a Security

The test established in the 1946 case of SEC v. W.J. Howey Co. to determine what a security is. According to the Howey test, an instrument is only a security if it involves an investment of money or other tangible or definable consideration in a common enterprise with a reasonable expectation of profits to be derived primarily from the entrepreneurial or managerial efforts of others. The form of the security (whether it is a formal certificate or nominal interests in the physical assets employed by the enterprise) is irrelevant. Thus, notes that a furniture store issues to finance a customer’s purchases are not securities, since their primary purpose is to facilitate the purchase. However, notes issued by a corporation for the general use of the company, where the buyer is primarily interested in the interest to be derived primarily from the entrepreneurial or managerial efforts of others. The form of the security (whether it is a formal certificate or nominal interests in the physical assets employed by the enterprise) is irrelevant. Thus, notes that a furniture store issues to finance a customer’s purchases are not securities, since their primary purpose is to facilitate the purchase. However, notes issued by a corporation for the general use of the company, where the buyer is primarily interested in the interest to be earned on the notes, would be considered a security.