Fractional Investment And Investment Contract

• Published date: 31 October 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Corporate and Company Law, Contracts and Commercial Law, Securities
• Law Firm: DR & AJU LLC
• Author: Byung Chang Lee

1. Reminder of Howey Case

I would like to shortly introduce some background facts of the Supreme Court of the United States in 1946. In early 1940s, a Florida corporation called W. J. Howey Company ("Howey Company") owned large tracts of citrus in Lake County and planted about 500 acres annually. Howey-in-the-Hills Service, Inc. ("Howey Service"), which is under direct common control and management with Howey Company, is a service company engaged in cultivating and developing these groves.

Prospective customers were offered both a land sales contract and a service contract. The land sales contract with the Howey Company provided a uniform purchase price per acre. Purchases were usually made for narrow strips of land arranged so that an acre consisted of a row of 48 trees. These tracts were not separately fenced, making the sole indication of ownership of small markings on the land intelligible only with a plat book record.

The service contract gave Howey Service a leasehold interest and complete possession of the acreage. For a specified fee plus the cost of labor and materials, Howey Service was given full discretion and authority over the cultivation of the groves and the harvest and marketing of the crops. Howey Service was accountable only for an allocation of the net profits. The two companies offered prospective purchasers an opportunity to contribute money and to share the profits of a large citrus grove with the purchasers' respective shares, evidenced by land sale contracts and warranty deeds.

The above is a short background of the famous Howey case. Based on the above background, the Supreme Court of the United States held that an investment contract for the purpose of the Securities Act means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.¹ The Supreme Court further held that all the elements of profit-seeking business ventures are present in this case. Thereafter it is called the Howey test, which requires "a contract, transaction or scheme" in which (i) a person invests money, (ii) in a common enterprise, and (iii) is led to expect profits (iv) solely from the efforts of the promoter or a third party.

2. Recent Guideline by Korean Authorities and Implications for Fractional Investment

Until recently, people using the Yeouido subway station could see a lot of advertisements for Music Cow, Co., Ltd. ("Music Cow")...