W. J. Howey Co. and Howey-in-the-Hills Service, Inc. were Florida corporations under direct common control and management. The Howey Company owned large tracts of citrus acreage in Florida. The service company cultivated, harvested, and marketed the crops.
For several years, Howey Company offered one-half of its planted acreage to the public to help it ‘‘finance additional development.'' Each prospective customer was offered both a land sales contract and a service contract with Howey-in-the-Hills after being told that it was not feasible to invest in the grove without a service arrangement.
Upon payment of the purchase price, the land was conveyed by warranty deed. The service company was given full discretion over cultivating and marketing the crop. The purchaser had no right of entry to market the crop. The service company also was accountable only for an allocation of the net profits after the companies pooled the produce.
The purchasers were predominantly nonresident businesspersons attracted by the expectation of substantial profits. Contending that this arrangement was an investment contract within the coverage of the Securities Act of 1933, the Securities and Exchange Commission (SEC) brought an action against the two companies to restrain them from using the mails and instrumentalities of interstate commerce in the offer and sale of unregistered and nonexempt securities. Should the SEC succeed?