The story we're going to go
through today goes to the heart

of whether what you're working
on right now is a security and

something that needs to be
registered with the SEC, or come

under an exemption or be part of
a blue sky law. Or if it's

something else just to contract.
Today, we're going to talk about

the case of SEC versus how.

As a syndication attorney and
attorney that works on private

equity funds, my favorite case
of all time has to be SEC vs.

Howey. This is the fundamental
case that talks about whether

something is a security or is
not. So I thought it would be

helpful for you to go through
that case, what happened and

what that decision is. And then
out of that, you can extract

what you're working on and apply
it and see, does this make

sense? And does what I'm working
on right now? Is that a security

or not? So let's go through it.
So, a long, long time ago, in

the 1930s and early 1940s, there
was a company named Howie, and

how he corporation did one thing
and it did it very well. They

would buy 500 acres of land. And
out of that 500 acres of land,

they would cut it up into strips
but not all the way. So they

would cut about half of it into
strips, and then the other half

they would they would leave for
themselves. Now these strips had

on them 48 orange trees. So
there'll be these 48 or an

orange trees. And what they
would do is they would or they

also owned a resort. Now I wish
I could draw a resort, but my

drawing skills are not that
good. So let's just pretend this

looks exactly like a nice,
beautiful resort with a big bay

window. In this resort, guests
would come from around the

country, not only from Florida,
but most of their guests would

come from other states. So the
guests would come and they would

see pamphlets as part of the
thing saying come visit the

beautiful orange trees. These
orange trees are just happened

to be the ones located on these
strips. So they'd come and visit

and then they would begin the
sales pitch. The sales pitch

when something like this Dear
Mr. investor, you see how

beautiful this place is we've
got orange trees, and you know

how much money we make from
those orange trees, we make a

lot of money. That's how we can
afford to have a beautiful

resort like the one you're
staying in. Do you like your

steak? Sure you do. Now as part
of your stay, you also get to

see this. But you know, we have
a special right now that we

would like you to be part of our
business. You see, we've got

these, these orange trees that
we've divided up into special

slit special things. And as part
of that we're offering to sell

you have a beautiful piece of
that tract of land that 48 trees

you can buy. Now most of our
people buy about five, five of

these strips, but you could buy
more, you can buy as many as you

like. But right now we're
selling these wonderful. And

what you'll get is full title.
We're not going to own anything

to do with this land. This is
your land where you can make

just as much money as we make
selling oranges. Now I

understand you're from out of
state. But as the deal goes, we

just so happened to be experts
at farming oranges. As you can

see, the orange trees are all in
bloom, everything's going very

nicely. So what we're willing to
do is this is we will take a

lease on your property. This is
supposed to be a lease. We'll

take a lease on that property
for 10 years. And as part of

that lease, we're going to pay
you money in because you own the

land, right? And so we're going
to pay you for the ticket to use

your land but we're also going
to pay you part of the profits.

Does that sound like a good deal
now what kind of returns you

Talking about I'm sure you've
seen many other hotels, on

Facebook and things like that
offering similar packages. Well,

right now we're not offering a
preferred return, but we are

offering an IRR of 20%. Sounds
pretty good and slick how safe

it is you own title to the land,
all you need to do is buy the

land. And we're going to enter
into this contract in order to

do the servicing of that land.
So that's the sales pitch that

these investors would hear. And
they would get people to invest

in this. And people would come
from around state. And so as

this became more and more
successful for how they also

decided that the resort was only
doing so well, that maybe they

should also just send regular
mail out. And so they'd send

regular mail and they'd either
invite them to the resort, or

they'd invite them to this and
they tell people about this

great investment opportunity.
Now that all sounds well and

good, right? Sounds like a
simple transaction. Well, the

SEC didn't agree the SEC said,
Hey, hold on a minute, you guys,

Howie, you're this is a security
what you're doing here. And that

as a security, it's just not
going to work. You need to

either registered, stir it or
you need to come under some

exemption. Now Rule five Reg D
did not exist at this point. But

there were other exemptions that
were occasionally used. So how

you need to get your act
together? How we said no, this

isn't a security at all. We
don't need to do that. And so it

went to court. And ultimately it
found its way up to the Court of

Appeals the Circuit Court of
Appeals. So that's the second

level. So when federal court
first and then I went up to the

to the Court of Appeals, and the
Court of Appeals looked at this

closely, and they said you know
what? We think how he's right.

We don't think that this is a
securities contract, that this

is an investment contract. See
the law is this. Let me drag

this over. This is what a
investment contract is. I may

delete these an investment
contract is a security are I

mean, it's a security is
something that is an investment

contract. But we don't think
this is an investment contract.

Why? Well, for two reasons. We
don't think this is an

investment contract, first of
all, is that it's not

speculative. The investors are
buying the land. Right. So

that's not speculative. They're
getting that land. It's there's

nothing speculative about it.
And the second problem with it

being a security is this, oops,
can't see this under the

picture. There we go. And the
second problem being a security

is this is that the sale itself
had value. So it was the sale of

the land that how he was
selling. And certainly the sales

of land isn't a security. Right?
Well, so this case went all the

way up to the Supreme Court. And
the Supreme Court took a look at

it, and they saw where it said
investment contract. And that's

what that was really the
question, what exactly is an

investment contract. Now also,
as a side note, I put some other

of the of what is a security
here, just because I think it's

interesting of promissory notes,
stock, treasury stock bonds,

certificates of interest,
participation and the profit

sharing agreement. And we'll
talk about those in just a

minute. But let's go back to
what the Supreme Court was

saying. And the Supreme Court
looked at this and said, You

know what, let's put that aside,
I think there should be a four

part test. And that four part
test should look like this, that

any time that there is an
investment of money in a common

enterprise, with the expectation
of profit, which is based on the

third on the on the effort of
others, that's an investment

contract, and that is a security
by the Securities Act of 1933.

So was there an investment of
money? Yes, there was an

investment of money in the land,
because they didn't people who

bought this land didn't have a
choice on how it would actually

be practical to service that
land. Right. So they bought the

land. And they actually they
bought it from Howie number two.

Was there a common enterprise?
Absolutely. This was orange

farming.I mean, you know, these
people were all coming together

in order to farm oranges to make
money, which is number three,

the expectation of profit. Now
if nobody goes and just buys a

strip of land in the middle of
Florida without there being some

expectation of profit, because
why would you buy a strip of

Orange Grove in the middle of
nowhere, just say you own one,

right? You're expecting to make
money. And number four, it's

based on the effort of others
hear how he was doing all the

work, they were leasing it, and
then they would do all the work

on the actual farming, and then
they share in the profits. So

this was the core element of why
it became why the way the

Supreme Court said Hunter,
Howie, this is an investment

contract, how he you did wrong,
the you this is a security. Now

let's go back to what to this
note one more time. So when we

take a look at what you are
working on, you have to ask

yourself, does it fit into those
categories? So does it meet? Is

it an investment contract? Was
there a contribution of money

and investment of money in a
common enterprise for the with

the expectation of profit based
on the work of another meaning

you the syndicator, probably is
that person or the fund manager

is that are those elements
there? Because there's other

things too, that also constitute
a security such as notes, a

promissory note, as long as
there's an investment going in

with the expectation, it may be
a security. Now, not all notes

are securities, but the ones
that I hear about all the time,

are securities, and that's where
they get a bunch of people

together, they say, Hey, we're
gonna borrow $5,000 or $5

million, in order to get our
business off the ground, and

we're gonna raise it from
friends and family. So that

doesn't qualify does it? We're
just gonna pay them simple

interest, we just are taking
loans from everybody. Well, the

only loans that are exempt from
this are really loans from banks

alone from from other people is
a security as long as it meets

those tests, as long as it's an
investment of money. So I'm

giving you this money in order
to for your business, within a

common enterprise, your business
with the expectation, with the

expectation of profit, I'm
expecting to get that money back

plus interest, and relying on
the work of another meaning you

I'm expecting you to do your
business so that you can afford

to pay me back. Right, that is a
security. Likewise, this

participation in any profit
sharing agreement, as long as

that profit sharing agreement is
relying on the investor taking a

passive role. That is a security
which must either be registered

with the SEC, or fall under an
exemption like Regulation D. And

it doesn't matter whether it's
written down or not. As I've

said in other videos, what
matters is what's in the

investors head. Does the
investor believe that they have

a passive role? Or do they
actually have a passive role,

either one of those is fine to
make it automatically US

security. So I hope that helps.
This is the big test in all of

securities, the Howey Test,
super famous, because it

outlines those four elements
that are present in any

security. It's the it's the very
clear rule, which helps us to

find it. Now, of course, there's
been new case law, but the new

case law has just helped help
let us know what the boundaries

are. Those are the still the
main four pillars in any test to

see whether or not it is a
security. My name is Tilden

Moschetti. I am a syndication
securities attorney with the

Moschetti Syndication Law Group.
Now if we can help you in your

offering and your security
offering, please don't hesitate

to give us a call. We can go
through whatever you're working

on and determine with you
whether or not it's a security,

we can talk about whether it
makes sense that it is or in

some cases it doesn't. Because
sometimes I've had people call

me and at the end of the day, I
don't think it's a security and

neither should they. So if we
can be of help to you and in

doing that exploration, we'd be
happy to do it.