what is the howey test 
the howey test is four criteria an asset must meet to qualify as an investment contract if the asset is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others it is considered a security it is then subject to disclosure and registration requirements under the securities act of 1933 and the securities exchange act of 1934 1the test applies to any contract scheme or transaction the howey test is important for evaluating blockchain and digital currency projects when developers are fundraising certain cryptocurrencies and initial coin offerings icos may be found to meet the definition of an investment contract under the test understanding the howey testthe howey test is based on a ruling from sec v w j howey co which reached the supreme court in 1946 howey company sold tracts of citrus groves to buyers in florida who would then lease back the land to howey company staff would tend to the groves and sell the fruit on behalf of the owners both parties shared in the revenue most buyers had no experience in agriculture and were not required to tend to the land themselves howey had failed to register the transactions and the u s securities and exchange commission sec intervened the court s final ruling determined the leaseback arrangements qualified as investment contracts 2the opinion of the supreme court stated that an investment contract for the purposes of the securities act means a contract transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third part 3 this statement created the four criteria now used as the howey test in the case of howey the buyers of the florida citrus groves saw the transactions as valuable primarily because the labor and expertise were provided by others buyers only needed to invest capital to access an income stream howey test and cryptocurrenciesdigital currencies such as bitcoin are notoriously difficult to categorize they are decentralized and as such elude regulation in many ways nonetheless the sec has taken an interest in digital assets and has sought to clarify when their sale meets the definition of an investment contract 4according to the sec the investment of money test is easily satisfied with the sale of digital assets because fiat money or other digital assets are exchanged with the expectation of profits or gains likewise the common enterprise test is also easily met 1 the commission has repeatedly used the test to pursue legal action against cryptocurrency developers examples of howey test on cryptocurrenciesin july 2023 the southern district of new york court released a summary judgment regarding the case sec v ripple a blockchain developer with a popular cryptocurrency xrp 5 the sec had filed an action against ripple in 2020 for an unlawful offer and sale of securities while ripple denied the accusations both parties petitioned for summary judgments regarding sales to institutional and retail investors 6the court ruled that ripple and its coin xrp did not pass the howey test when the cryptocurrency was sold in a secondary sale such as through an exchange at the same time it found that the sale did pass the howey test when xrp was offered to or purchased by institutional investors 7the court ruling remains controversial because the crypto industry declared victory while the sec continued its efforts to regulate cryptocurrency using the howey test on july 13 2023 the sec filed a complaint against celsius network limited for issuing unregistered securities and selling crypto asset securities it then filed a complaint against digital world exchange boostedpro and d w exchange on july 21 2023 for promoting offering and selling exchange tokens and crypto asset securities it is possible the entities committed these acts but the sec clearly hasn t backed down from applying the test to cryptocurrencies 8910