The Howey Test

Last Updated on January 14, 2023

The Howey Test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an “investment contract,” and therefore would be considered a security and subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The Supreme Court established four criteria to determine whether an investment contract exists:

  1. An investment of money
  2. In a common enterprise
  3. With the expectation of profit
  4. To be derived from the efforts of others

The test applies to any contract, scheme, or transaction. The Howey Test is important for situating blockchain and digital currency projects with investors and project backers. Certain cryptocurrencies and initial coin offerings (ICOs) may be found to meet the definition of an “investment contract” under the test.

BTC, Alts, Securities, Commodities

On several occasions, the Securities and Exchange Commission (SEC) chairman, Gary Gensler, mentioned that most crypto assets are securities. However, bitcoin is a commodity, not adhering to the Howey Test. 

Why Is Bitcoin Not a Security?

Cryptocurrencies are replacements for sovereign currencies, replace the dollar, the euro, the yen with bitcoin. That type of currency is not a security.

Bitcoin, which has never sought public funds to develop its technology, does not pass the Howey Test used by the SEC to classify securities. However, by Clayton’s definition, tokens used in an ICO are securities.

How Does the SEC Define a Security?

Securities are fungible and tradable financial instruments used to raise capital in public and private markets. The public sales of securities are regulated by the SEC.