ICO Law: The Howey Test and How To Figure Out If Your Token Is A Security

Feb 28, 2019

Howey Test ICO Law: Is my ICO a security according to the SECWe’re ICO lawyers who help businesses and startups with domestic and international fintech compliance. In that capacity, we regularly guide clients through the U.S. Securities and Exchange Commission’s regulatory maze, and a big part of that puzzle is determining if a token offering qualifies as a security. To make that determination, judges use the Howey Test.

Seminal Securities Case: SEC v. W.J. Howey Co.

The Howey Test was born of a 1946 Supreme Court case, SEC v. W.J. Howey Co.

A seminal lawsuit that shaped federal securities law, the ruling established that “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.”

Howey Test Questions: Determining If Your ICO Qualifies As A Security

If you want to read about the case details, click here. However, what today’s ICOs need to understand, practically speaking, is the four-prong test it spawned and how the SEC uses it to determine whether or not an ICO is a security subject to SEC regulation.

he Howey Test defines an investment contract as one where a party:

  • Invests money,
  • In a common enterprise,
  • With the expectation of profiting,
  • Based on the efforts of a third party.

The majority of today’s tokens inherently carry rights, whether special access or potential future profits. As such, it’s exceptionally rare to launch an ICO that doesn’t qualify as a security. Moreover, in 2017, the SEC declared that the tokens of a popular crypto community, The DAO, were securities. The decision established a regulatory expectation that most ICOs are subject to the Securities Act of 1933.

Connect With An ICO Lawyer

Our team has been involved in the blockchain and cryptocurrency markets since they hatched. We work with ICOs and individuals on everything from crypto tax positioning to SEC compliance.

And remember, most ICOs are securities, not all. Factors like jurisdiction and business structure matter. Give us a call to learn more.

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