Topic · Money, companies and rules
What is the Howey test?
- Quick fact 1
The Howey test comes from SEC v. W. J. Howey Co., 328 U.S. 293 (1946).
Source: U.S. Supreme Court: SEC v. W. J. Howey Co., 328 U.S. 293 (1946)
- Quick fact 2
The Court described an investment contract as investing money in a common enterprise expecting profits solely from the efforts of others.
Source: U.S. Supreme Court: SEC v. W. J. Howey Co., 328 U.S. 293 (1946)
- Quick fact 3
The CFTC also oversees some crypto markets, including fraud in commodities like bitcoin.
Source: CFTC customer advisory: Understand the risks of virtual currency trading
The short lesson
In the 1940s, a Florida company sold rows of orange trees to buyers who then let the company tend and harvest them for a share of the profits. The U.S. Supreme Court said that was really an investment, a security, even though the paperwork said “land.” The case was SEC v. W. J. Howey Co.
From it came the Howey test. Something is an investment contract when there is:
- an investment of money,
- in a common enterprise,
- with an expectation of profits,
- from the efforts of others.
Why crypto people talk about it
If a token sale meets the test, U.S. securities laws can apply, including registration and disclosure. Whether a given token passes or fails has been argued in many cases, and new laws and agency guidance keep changing the picture. See the CLARITY Act and crypto regulation.
Why it helps beginners
You do not need to be a lawyer. The test is a good gut check: if someone wants your money and promises that their work will make it grow, ask hard questions.
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Related terms
Go deeper in Lesson 10: How to keep learning
More in Money, companies and rules
Common questions
Is bitcoin a security?
U.S. regulators have generally treated bitcoin as a commodity. Other tokens are judged case by case.
Who applies the Howey test?
Courts and the SEC, when deciding whether securities laws apply.
Does Howey decide if a token is a good investment?
No. It is a legal test, not a quality score.
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Written and reviewed by Joshua Baskin, founder. Last reviewed . How we check facts · Report an error
Education only. Not investment, tax or legal advice. We do not pick coins.