Howey Test

The Howey test is the legal standard U.S. courts use to decide whether an arrangement is an "investment contract" and therefore a security. It comes from a 1946 Supreme Court case involving orange groves and asks four questions: is there an investment of money, in a common enterprise, with an expectation of profit, derived primarily from the efforts of others? If all four are met, securities laws apply.

The test matters enormously in crypto because it is the main tool the SEC uses to argue that token sales are securities offerings. For example, an initial coin offering where buyers send funds to a startup that promises to build a network and grow the token's value checks every Howey box: money invested, a common enterprise, profit expectations, and reliance on the team's work. By contrast, an asset that is fully decentralized, with no central promoter whose efforts drive returns, fits the test poorly, which is a key reason bitcoin is generally not treated as a security.

A common misconception is that the Howey test classifies the token itself; strictly, it evaluates the transaction and circumstances of sale, so the same token could be part of a securities offering in one context and not in another. The test is U.S. law, but its logic has influenced how regulators worldwide think about token classification.