CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
Burger, Douglas, Brennan, Stewart, White, Marshall, Blackmun, Powell, Rehnquist
MR. JUSTICE POWELL delivered the opinion of the Court.
The issue in these cases is 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.
Co-op City is a massive housing cooperative in New York City. Built between 1965 and 1971, it presently houses approximately 50,000 people on a 200-acre site containing 35 high-rise buildings and 236 town houses. The project was organized, financed, and constructed under the New York State Private Housing Finance Law, commonly known as the Mitchell-Lama Act, enacted to ameliorate a perceived crisis in the availability of decent low-income urban housing. In order to encourage private
developers to build low-cost cooperative housing, New York provides them with large long-term, low interest mortgage loans and substantial tax exemptions. Receipt of such benefits is conditioned on a willingness to have the State review virtually every step in the development of the cooperative. See N. Y. Priv. Hous. Fin. Law §§ 11-37, as amended (1962 and Supp. 1974-1975). The developer also must agree to operate the facility "on a nonprofit basis," § 11-a (2a), and he may lease apartments only to people whose incomes fall below a certain level and who have been approved by the State.*fn1
The United Housing Foundation (UHF), a nonprofit membership corporation established for the purpose of "aiding and encouraging" the creation of "adequate, safe and sanitary housing accommodations for wage earners and other persons of low or moderate income,"*fn2 Appendix in Court of Appeals 95a (hereafter App.), was responsible for initiating and sponsoring the development of Co-op City. Acting under the Mitchell-Lama Act, UHF organized the Riverbay Corporation (Riverbay) to own and operate the land and buildings constituting Co-op City. Riverbay, a nonprofit cooperative housing corporation, issued the stock that is the subject of this litigation. UHF also contracted with Community Services, Inc. (CSI), its wholly owned subsidiary, to serve as the general contractor and sales
agent for the project.*fn3 As required by the Mitchell-Lama Act, these decisions were approved by the State Housing Commissioner.
To acquire an apartment in Co-op City an eligible prospective purchaser*fn4 must buy 18 shares of stock in Riverbay for each room desired. The cost per share is $25, making the total cost $450 per room, or $1,800 for a four-room apartment. The sole purpose of acquiring these shares is to enable the purchaser to occupy an apartment in Co-op City; in effect, their purchase is a recoverable deposit on an apartment. The shares are explicitly tied to the apartment: they cannot be transferred to a non-tenant; nor can they be pledged or encumbered; and they descend, along with the apartment, only to a surviving spouse. No voting rights attach to the shares as such: participation in the affairs of the cooperative appertains to the apartment, with the residents of each apartment being entitled to one vote irrespective of the number of shares owned.
Any tenant who wants to terminate his occupancy, or who is forced to move out,*fn5 must offer his stock to Riverbay at its initial selling price of $25 per share. In the extremely unlikely event that Riverbay declines to repurchase the stock,*fn6 the tenant cannot sell it for more than
the initial purchase price plus a fraction of the portion of the mortgage that he has paid off, and then only to a prospective tenant satisfying the statutory income eligibility requirements. See N. Y. Priv. Hous. Fin. Law § 31-a (Supp. 1974-1975).
In May 1965, subsequent to the completion of the initial planning, Riverbay circulated an Information Bulletin seeking to attract tenants for what would someday be apartments in Co-op City. After describing the nature and advantages of cooperative housing generally and of Co-op City in particular, the Bulletin informed prospective tenants that the total estimated cost of the project, based largely on an anticipated construction contract with CSI, was $283,695,550. Only a fraction of this sum, $32,795,550, was to be raised by the sale of shares to tenants. The remaining $250,900,000 was to be financed by a 40-year low-interest mortgage loan from the New York Private Housing Finance Agency. After construction of the project the mortgage payments and current operating expenses would be met by monthly rental charges paid by the tenants. While these rental charges were to vary, depending on the size, nature, and location of an apartment, the 1965 Bulletin estimated that the "average" monthly cost would be $23.02 per room, or $92,08 for a four-room apartment.
Several times during the construction of Co-op City, Riverbay, with the approval of the State Housing Commissioner, revised its contract with CSI to allow for increased construction costs. In addition, Riverbay incurred other expenses that had not been reflected in the
Bulletin. To meet these increased expenditures, Riverbay, with the Commissioner's approval, repeatedly secured increased mortgage loans from the State Housing Agency. Ultimately the construction loan was $125 million more than the figure estimated in the 1965 Bulletin. As a result, while the initial purchasing price remained at $450 per room, the average monthly rental charges increased periodically, reaching a figure of $39.68 per room as of July 1974.*fn7
These increases in the rental charges precipitated the present lawsuit. Respondents, 57 residents of Co-op City, sued in federal court on behalf of all 15,372 apartment owners, and derivatively on behalf of Riverbay, seeking upwards of $30 million in damages, forced rental reductions, and other "appropriate" relief. Named as defendants (petitioners herein) were UHF, CSI, Riverbay, several individual directors of these organizations, the State of New York, and the State Private Housing Finance Agency. The heart of respondents' claim was that the 1965 Co-op City Information Bulletin falsely represented that CSI would bear all subsequent cost increases due to factors such as inflation. Respondents further alleged that they were misled in their purchases of shares since the Information Bulletin failed to disclose several critical facts.*fn8 On these bases,
respondents asserted two claims under the fraud provisions of the federal Securities Act of 1933, as amended, § 17(a), 48 Stat. 84, 15 U.S.C. § 77q(a); the Securities Exchange Act of 1934, as amended, § 10(b), 48 Stat. 891, 15 U.S.C. § 78j(b); and 17 CFR § 240.10b-5 (1975). They also presented a claim against the State Financing Agency under the Civil Rights Act of 1871, 42 U.S.C. § 1983, and 10 pendent state-law claims.
Petitioners, while denying the substance of these allegations,*fn9 moved to dismiss the complaint on the ground that federal jurisdiction was lacking. They maintained that shares of stock in Riverbay were not "securities" within the definitional sections of the federal Securities Acts. In addition, the state parties moved to dismiss on sovereign immunity grounds.
The District Court granted the motion to dismiss. Forman v. Community Services, Inc., 366 F. Supp. 1117 (SDNY 1973). It held that the denomination of the shares in Riverbay as "stock" did not, by itself, make them securities under the federal Acts. The court further ruled, relying primarily on this Court's decisions in SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943), and SEC v. W. J. Howey Co., 328 U.S. 293 (1946), that the purchase in issue was not a security transaction since it was not induced by an offer of tangible material profits, nor could such profits realistically be expected. In the District Court's words, it was
"the fundamental nonprofit nature of this transaction" which presented "the insurmountable barrier to [respondents'] claims in th[e] federal court." 366 F. Supp., at 1128.*fn10
The Court of Appeals for the Second Circuit reversed. Forman v. Community Services, Inc., 500 F.2d 1246 (1974). It rested its decision on two alternative grounds. First, the court held that since the shares purchased were called "stock" the Securities Acts, which explicitly include "stock" in their definitional sections, were literally applicable. Second, the Court of Appeals concluded that the transaction was an investment contract within the meaning of the Acts and as defined by Howey, since there was an expectation of profits from three sources: (i) rental reductions resulting from the income produced by the commercial facilities established for the use of tenants at Co-op City; (ii) tax deductions for the portion of the monthly rental charges allocable to interest payments on the mortgage; and (iii) savings based on the fact that apartments at Co-op City cost substantially less than comparable nonsubsidized housing. The court further ruled that the immunity claims by the state parties were unavailing.*fn11 Accordingly, the
case was remanded to the District Court for consideration of respondents' claims on the merits.
In view of the importance of the issues presented we granted certiorari. 419 U.S. 1120 (1975). As we conclude that the disputed transactions are not purchases of securities within the contemplation of the federal statutes, we reverse.
Section 2 (1) of the Securities Act of 1933, 15 U.S.C. § 77b(1), defines a "security" as S
"any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a 'security,' or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing."*fn12
In providing this definition Congress did not attempt to articulate the relevant economic criteria for distinguishing "securities" from "non-securities." Rather, it sought to define "the term 'security' in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world
fall within the ordinary concept of a security." H.R. Rep. No. 85, 73d Cong., 1st Sess., 11 (1933). The task has fallen to the Securities and Exchange Commission (SEC), the body charged with administering the Securities Acts, and ultimately to the federal courts to decide which of the myriad ...