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

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

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

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

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

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the case of SEC versus how.

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As a syndication attorney and
attorney that works on private

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

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Howey. This is the fundamental
case that talks about whether

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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see pamphlets as part of the
thing saying come visit the

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beautiful orange trees. These
orange trees are just happened

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Facebook and things like that
offering similar packages. Well,

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

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

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

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

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

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

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

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this became more and more
successful for how they also

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

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

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

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

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great investment opportunity.
Now that all sounds well and

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

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

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

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

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

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

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there were other exemptions that
were occasionally used. So how

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

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

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

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

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

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

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

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

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

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

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delete these an investment
contract is a security are I

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

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

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

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

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

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

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nothing speculative about it.
And the second problem with it

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

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

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

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

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

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

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

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what that was really the
question, what exactly is an

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

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

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interesting of promissory notes,
stock, treasury stock bonds,

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certificates of interest,
participation and the profit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Was there a common enterprise?
Absolutely. This was orange

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

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

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

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

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

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

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

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

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

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

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

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Supreme Court said Hunter,
Howie, this is an investment

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

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

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

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

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it an investment contract? Was
there a contribution of money

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and investment of money in a
common enterprise for the with

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the expectation of profit based
on the work of another meaning

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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common enterprise, your business
with the expectation, with the

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

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

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

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

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participation in any profit
sharing agreement, as long as

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that profit sharing agreement is
relying on the investor taking a

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

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

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

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

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investors head. Does the
investor believe that they have

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

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either one of those is fine to
make it automatically US

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

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securities, the Howey Test,
super famous, because it

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outlines those four elements
that are present in any

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

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

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

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

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

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Moschetti. I am a syndication
securities attorney with the

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

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offering and your security
offering, please don't hesitate

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

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

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

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

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

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

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