ARTICLE: THE HOWEY TEST TURNS 64: ARE THE COURTS GRADING THIS TEST ON A CURVE? Skip over navigation
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Copyright 2011 William & Mary Business Law Review. All Rights Reserved.
William & Mary Business Law Review

ARTICLE: THE HOWEY TEST TURNS 64: ARE THE COURTS GRADING THIS TEST ON A CURVE?

February, 2011

William & Mary Business Law Review

2 Wm. & Mary Bus. L. Rev. 1

Author

MIRIAM R. ALBERT *

Excerpt

INTRODUCTION

Sixty-four years ago, the Supreme Court decided SEC v. W.J. Howey Co., 1 crafting a definition for one form of security, known as an investment contract. Discussion by judges and academics of the Supreme Court's definition of investment contract, which has come to be known as the Howey test, has primarily focused on the individual components of the test, 2 virtually ignoring the more fundamental underlying question explored in this Article, whether the Howey test itself furthers investor protection through mandatory disclosure and anti-fraud liability, the intended purpose of the federal securities laws. 3 The Howey test seeks to identify transactions in which investors are relying on others to manage the enterprise that will produce financial returns on their investments. 4 The theory is that these investors need the disclosure that would come from registration under the federal securities laws more than investors who are themselves participating in the management of the enterprise. 5

Under the Howey test, any interest that "involves an investment of money in a common enterprise with profits to come solely from the efforts of others" is an investment contract, 6 thereby included within the definition of "security" and subject to the rules and regulations of the federal securities laws. 7 The term "security" is defined broadly 8 in both the Securities Act of 1933 (1933 Act) 9 and the Securities Exchange Act of 1934 (1934 Act). 10 Both statutes provide a laundry list of examples and categories of ...
 
 
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