united-states new-jersey securities sec
Is the Howey test pertaining to the source of profits or the receiving of profits?
<p>The Howey test states:</p>
<p>&quot;investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others&quot;</p>
<p>Is this &quot;profits to be derived from the efforts of others&quot; pertaining to the source of the money (imagine the money coming from people not including yourself thus from the efforts of others) or the receiving of profits (so it would mean the money source could be other people. As long as you yourself are NOT an active participant and are NOT showing some level of work to acquire the profits in some kind of work or competition of skill or luck regardless of the source of the money you're participating to acquire.)</p>
<p>Thank you.</p>

<p>The <em>Howey</em> test is a test of what constitutes an &quot;investment contract&quot;, which is a residual form of security subject to the federal Securities Act of 1933 and the federal Securities Exchange Act of 1934. There are also many <em>per se</em> securities which automatically qualify without analysis under that test.</p>
<p>An arrangement that merely constitutes active participation in self-employment is not a security, even if it flows from activities of others (like customers paying money) and even if you must invest some money (e.g. a buy-in price to become a partner in a law firm).</p>
<p>For example, if you take over a one man sole proprietorship landscaping business from its previous owner, the business purchased is not a security, because the business you are purchasing does not have you profiting from work done by other people, you seeking to make money from your own work.</p>
<p>But, if offered to pay the owner of the sole proprietorship landscaping business $100,000 in exchange for 50% of his future profits, without having to work in the business yourself, that would be an investment contract that constitutes a security, for purposes of federal securities laws, under <em>Howey</em>.</p>
