Howey Test To Determine If An Investment Is A Security

The 1946 U.S. Supreme Court case of SEC v. W.J. Howey Co. provides the precedence 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 used 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 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 economic gain to be derived from the entrepreneurial or managerial efforts of others, would be a security. The form of the security (whether it is a formal certificate or nominal interests in the physical assets employed by the enterprise) is irrelevant.

Inquiries of a technical nature are always encouraged. Contact Securities Attorney Laura Anthony.