The Howey Test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an “investment contract.” It 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. Under the Howey Test of the U.S. Securities and Exchange Commission (SEC), an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Digital currencies such as bitcoin and Electra Protocol are notoriously difficult to categorize. The Howey Test applies to any contract, scheme, or transaction – on matter if performed on a blockchain or not. The test is important for situating blockchain and digital currency projects with investors and project backers. Most cryptocurrencies and its funding instruments
- initial coin offerings (ICOs),
- initial dex offerings (IDOs),
- initial exchange offerings (IEOs) through launchpad auctions,
- venture capital (VC), and
may be found to meet the definition of an “investment contract” under the test. As a result, all cryptocurrencies which performed a funding would be subject to be classified as a security by the SEC. Because of the Howey Test, most fundings that take place today are likely to be off-limits to U.S investors. In 2018, then-SEC Chair Jay Clayton said every funding he’d seen could be classified as a security.