Howey Test

The Howey Test is the standard used in the U.S. to decide whether a transaction is an "investment contract" and therefore a security subject to federal securities laws. The Supreme Court set it in SEC v. W. J. Howey Co., 328 U.S. 293, decided on May 27, 1946, and it is binding precedent.

The formulation. There is an investment contract when a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party (328 U.S. 298-299). It does not matter whether the enterprise is speculative or not (328 U.S. 301). It is usually summarized in four elements: investment of money, common enterprise, expectation of profit and the efforts of others. The ruling says "solely"; the SEC now refers to promises of essential managerial efforts (Release No. 33-11412, section IV.A).

The SEC's 2026 interpretation. On March 17, 2026, the Commission, jointly with the CFTC, issued Release No. 33-11412 (91 FR 13714, effective March 23, 2026). It does not replace Howey, which it calls "binding legal precedent," and it supersedes the 2019 staff framework. It sorts crypto-assets into five categories: digital commodities, digital collectibles and digital tools, which are not securities in themselves; stablecoins, depending on the case; and digital securities, which are. A crypto-asset can become subject to an investment contract and later separate from it (section IV.B).

Tokenizing does not change the nature. A tokenized security is still a security, whether onchain or offchain (section III.E; also the staff statement of January 28, 2026, which is not binding). If a token is a security, its offering needs registration or an exemption such as Regulation D, Regulation A+ or Regulation Crowdfunding. In 2018, the SEC sanctioned Paragon Coin, whose ICO was to fund a blockchain business for the cannabis industry that included buying real estate: it imposed a $250,000 penalty, and the company undertook to register its token as a security (Section 12(g)) and to offer refunds to purchasers (Release No. 33-10574). The proposed "Regulation Crypto Assets" (comments due October 20, 2026) would add a safe harbor from the investment contract concept; it is not a rule.

Outside the U.S. Howey is U.S. law. In the EU, whether a token is a financial instrument is decided under MiFID II (Directive 2014/65/EU) and, in Spain, Law 6/2023; if it is not, it may fall under MiCA. Context in asset tokenization in the U.S.

Official sources: 328 U.S. 293 (Library of Congress); Release No. 33-11412; Statement on Tokenized Securities; Paragon Coin order; proposed Regulation Crypto Assets.

Framework verified as of October 13, 2026. At Unknown Gravity we build the platform, smart contracts and integrations, working alongside the client's U.S. securities counsel and registered intermediaries. Talk to us.