Howey Test

Imagine a four-question test used to decide whether something you sell is, in reality, a “serious” investment that the regulator must oversee. That test was born in the US in 1946 from a case about orange groves (the Howey company), and it is still used today for tokens.

The questions are simple: do people put in money? Into a common enterprise? Expecting to profit? Thanks to the work of others? If the answer to all four is “yes,” then it is a security and must comply with financial rules. That is why, when someone launches a token, people in the US ask: “does it pass the Howey Test?”

The Howey Test is the case-law criterion established by the US Supreme Court in SEC v. W. J. Howey Co., 328 U.S. 293 (1946), to determine the existence of an investment contract and, therefore, of a security subject to US federal securities law.

It is met where there is: (i) an investment of money; (ii) in a common enterprise; (iii) with a reasonable expectation of profits; (iv) derived essentially from the efforts of a third party or promoter. The SEC has applied this test to classify numerous tokens as securities. It is a criterion of US law and is not directly applicable in the EU, where the classification of a token as a financial instrument is governed by MiFID II (Directive 2014/65/EU) and, in Spain, by Ley 6/2023 (LMVSI); nonetheless, it serves as a common conceptual reference in international tokenisation practice.