421 U.S. 837 (1975)
In 1965, the United Housing Foundation, a nonprofit membership corporation, sponsored the development of Co-op City, a large housing cooperative in New York City under the Mitchell-Lama Act.1 UHF organized the Riverbay Corporation to own and operate the project, which was constructed between 1965 and 1971 and ultimately housed approximately 50,000 residents in 35 high-rise buildings and 236 town houses on a 200-acre site.2 Riverbay contracted with Community Services, Inc., a wholly owned subsidiary of UHF, to act as general contractor and sales agent, with all decisions approved by the State Housing Commissioner.3
To acquire an apartment, prospective purchasers were required to buy 18 shares of Riverbay stock per room at $25 per share.4 These shares could not be transferred to non-tenants, pledged, or encumbered, and carried no proportional voting rights; upon termination of occupancy, the stock had to be offered back to Riverbay at the original purchase price.5 The project was financed primarily through a long-term low-interest mortgage loan from the New York Private Housing Finance Agency, with the balance raised from share sales, and monthly rental charges paid by tenants to cover mortgage payments and operating expenses.6
In May 1965, Riverbay circulated an Information Bulletin estimating the total project cost at $283,695,550, with $32,795,550 from share sales and the remainder from a 40-year mortgage; the bulletin projected average monthly charges of $23.02 per room.7 During construction, increased costs led to contract revisions and additional mortgage loans totaling $125 million more than estimated, resulting in monthly charges rising to $39.68 per room by July 1974.8
Fifty-seven residents of Co-op City, suing on behalf of all 15,372 apartment owners and derivatively on behalf of Riverbay, filed suit in federal district court against UHF, CSI, Riverbay, individual directors, the State of New York, and the State Private Housing Finance Agency.9 They alleged that the Information Bulletin contained false representations and material omissions regarding cost increases and related facts, asserting claims under the fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, along with a claim under 42 U.S.C. § 1983 and pendent state-law claims.10
The district court dismissed the complaint for lack of federal jurisdiction.11 The Court of Appeals for the Second Circuit reversed, and the Supreme Court granted certiorari.12
Whether shares of stock entitling a purchaser to lease an apartment in Co-op City, a state subsidized and supervised nonprofit housing cooperative, are securities within the purview of the Securities Act of 1933 and the Securities Exchange Act of 1934?13
Congress defined a security broadly in the Securities Act of 1933 and the Securities Exchange Act of 1934 to include stock and investment contracts, but courts must disregard form for substance and focus on economic reality, applying the test from SEC v. W. J. Howey Co. of whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.14
No. The shares of stock in Riverbay are not securities under the Acts because the transaction was not induced by an offer of tangible material profits and purchasers could not realistically expect such profits.15 The economic reality of the transaction shows that the inducement to purchase was solely to acquire subsidized low-cost living space, not to invest for profit, as the shares lack the right to receive dividends contingent upon an apportionment of profits, are not negotiable, cannot be pledged, confer no voting rights in proportion to shares owned, and cannot appreciate in value.16 The supposed sources of profit identified by the court of appeals, including tax deductions, below-market rents from state subsidies, and income from commercial facilities, do not constitute the profits from the efforts of others required by the Howey test, since tax benefits are available to any homeowner, subsidies do not result from managerial efforts, and commercial income was speculative, insubstantial, and not mentioned in the bulletin as an attraction.17
The shares of stock entitling purchasers to apartments in Co-op City are not securities under the Securities Act of 1933 and the Securities Exchange Act of 1934.18
Related opinions on this issue
Joined by Mr. Justice Douglas And Mr. Justice White
Justice Brennan dissented, maintaining that the property interests are securities both because they are shares of stock and because they are investment contracts.19 He argued that Co-op City residents invested money in a common enterprise with profits to come solely from the efforts of others, including revenues well in excess of $1 million per year from commercial and office space, tax benefits realized through specialized management skills, and reduced monthly charges from efficient operation and government subsidies obtained through the efforts of management.20 Brennan contended that the majority's distinction among types of economic inducements has no bearing on the motives of investors.21 He also argued that the presence of an element of consumption does not remove the transaction from the securities laws when an investment element is also present.22
He concluded that the Court of Appeals correctly held that the District Court erred in dismissing the suit and that the federal securities laws protect these investors.23