Howey Test

The Howey Test is the legal framework established by the U.S. Supreme Court in SEC v. W.J. Howey Co. (1946) that determines whether a transaction qualifies as an investment contract and therefore a security subject to SEC registration and disclosure requirements.

The test establishes that an investment contract exists when there is: (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) derived from the efforts of others. All four points must be satisfied for an asset to be classified as a security.

In the crypto and digital asset context, the SEC has aggressively applied the Howey Test to determine that many tokens sold through initial coin offerings qualify as securities. The SEC considers whether token buyers invested money expecting profits from the development team's efforts to build a platform, create utility, or drive adoption. Tokens that pass the Howey Test require registration or exemption under securities laws, subjecting issuers to disclosure, antifraud, and investor protection requirements. The test remains central to regulatory enforcement actions against crypto exchanges, token issuers, and DeFi protocols operating in U.S. markets.