United Housing Foundation, Inc. v. Forman

Supreme Court of the United States · 1975 · Corporations

CorporationsSecuritiesCooperative housingsecuritystockinvestment contracteconomic realityHowey

Facts

Co-op City was a state-subsidized, state-supervised nonprofit housing cooperative organized under New York's Mitchell-Lama Act. To obtain an apartment, an eligible person had to buy Riverbay shares tied to the right to lease a specific apartment, but the shares could not be freely transferred, pledged, voted in proportion to ownership, or sold for appreciation. Monthly charges rose substantially above early estimates, and residents alleged that the information bulletin misrepresented and omitted material facts about costs. The only practical purpose of buying the shares was to secure low-cost housing, and any departing tenant generally could recover the original purchase price from Riverbay.

Issue

Whether shares of stock entitling a purchaser to lease an apartment in Co-op City were "securities" under the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, the Court considered whether the shares were securities either because they were labeled "stock" or because they constituted an investment contract or an instrument commonly known as a security.

Rule

An instrument is not a security merely because it is labeled "stock"; courts must look to the economic reality of the transaction. Under Howey, the touchstone is an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others, and when a purchaser is motivated by a desire to use or consume the item purchased rather than by profit, the securities laws do not apply.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Seattle, Evergreen Harbor Cooperative, a nonprofit housing association, requires each applicant to buy a certificate labeled "common stock" before receiving the right to occupy an apartment. The certificate cannot be sold on any market, cannot be pledged, carries one vote per apartment rather than per share, and must be resold to the cooperative at the original price when the resident leaves.

A resident sues under the federal securities laws, arguing that the instrument is a security because it is expressly called "common stock." What is the strongest response?

Explanation. The majority held that calling an instrument "stock" does not control. Courts must examine substance and economic reality. Where the interest lacks traditional stock characteristics and is purchased solely to obtain living space rather than profit, it is not a security. (Derived from United Housing Foundation, Inc. v. Forman (n.d.).)