Crypto glossary
Howey test
The Howey test is the US legal standard used to decide whether a deal is an investment contract, and therefore a security, including many token sales.
The test comes from a 1946 US Supreme Court case, SEC v. W.J. Howey Co., about the sale of Florida citrus groves bundled with a service contract. The court held that an investment contract exists when there is an investment of money in a common enterprise with an expectation of profits derived from the efforts of others.
Regulators and courts apply these elements to tokens. If buyers pay for a token mainly expecting its value to rise thanks to the work of a founding team, the sale may be a securities offering that needs registration. The SEC applied this reasoning to The DAO in a 2017 report and later to many ICOs, and the 2023 Ripple ruling distinguished between sales to institutions and anonymous exchange sales.
The test is flexible and fact-specific, so the same token can be judged differently depending on how it was sold and how decentralized the project has become. That uncertainty is a major reason the industry has pushed for dedicated crypto legislation.
Example
A team that sells tokens to fund development and promises buyers that its work will push the price up is a textbook case of the elements the Howey test looks for.
