What Is the Howey Test?

To determine whether a transaction qualifies as a "investment contract" and thus qualifies as a security, the Howey Test refers to the U.S. Supreme Court cass: the Securities Act of 1933 and the Securities Exchange Act of 1934. According to the Howey Test, an investment contract exists when "money is invested in a common enterprise with a reasonable expectation of profits from others' efforts." 

The test applies to any contract, scheme, or transaction. The Howey Test helps investors and project backers understand blockchain and digital currency projects. ICOs and certain cryptocurrencies may be found to be "investment contracts" under the test.

Understanding the Howey Test

The Howey Test comes from the 1946 Supreme Court case SEC v. W.J. Howey Co. The Howey Company sold citrus groves to Florida buyers who leased them back to Howey. The company would maintain the groves and sell the fruit for the owners. Both parties benefited. Most buyers had no farming experience and were not required to farm the land. 

The SEC intervened because Howey failed to register the transactions. The court ruled that the leaseback agreements were investment contracts.

This established four criteria for determining an investment contract. Investing contract:

1. An investment of money
2. n a common enterprise
3. With the expectation of profit
4. To be derived from the efforts of others

In the case of Howey, the buyers saw the transactions as valuable because others provided the labor and expertise. An income stream was obtained by only investing capital. As a result of the Howey Test, the transaction had to be registered with the SEC.

Howey Test and Cryptocurrencies

Bitcoin is notoriously difficult to categorize. Decentralized, they evade regulation in many ways. Regardless, the SEC is looking into digital assets and determining when their sale qualifies as an investment contract.

The SEC claims that selling digital assets meets the "investment of money" test because fiat money or other digital assets are being exchanged. Like the "common enterprise" test. 

Whether a digital asset qualifies as an investment contract depends on whether there is a "expectation of profit from others' efforts."

For example, buyers of digital assets may be relying on others' efforts if they expect the project's backers to build and maintain the digital network, rather than a dispersed community of unaffiliated users. Also, if the project's backers create scarcity by burning tokens, the test is met. Another way the "efforts of others" test is met is if the project's backers continue to act in a managerial role.

These are just a few examples given by the SEC. If a project's success is dependent on ongoing support from backers, the buyer of the digital asset is likely relying on "others' efforts."

Special Considerations

If the SEC determines a cryptocurrency token is a security, many issues arise. It means the SEC can decide whether a token can be sold to US investors and forces the project to register. 

In 2017, the SEC ruled that selling DAO tokens for Ether violated federal securities laws. Instead of enforcing securities laws, the SEC issued a warning to the cryptocurrency industry. 

Due to the Howey Test, most ICOs today are likely inaccessible to US investors. After a year of ICOs, then-SEC Chair Jay Clayton declared them all securities. 

Howey Test FAQs

How Do You Determine If Something Is a Security?

The Howey Test determines whether certain transactions are "investment contracts." Securities are transactions that qualify as "investment contracts" under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The Howey Test looks for a "investment of money in a common enterprise with a reasonable expectation of profits from others' efforts." If so, the Securities Act of 1933 and the Securities Exchange Act of 1934 require disclosure and registration.

Why Is Bitcoin Not a Security?

Former SEC Chair Jay Clayton clarified in June 2018 that bitcoin is not a security: "Cryptocurrencies: Replace the dollar, euro, and yen with bitcoin. That type of currency is not a security," said Clayton.

Bitcoin, which has never sought public funding to develop its technology, fails the SEC's Howey Test. However, according to Clayton, ICO tokens are securities. 

A Security Defined by the SEC

In the public and private markets, securities are fungible and tradeable financial instruments. The SEC regulates public securities sales.

The Supreme Court defined a security offering in SEC v. W.J. Howey Co. In its judgment, the court defines a security using four criteria:

• An investment contract's existence
• The formation of a common enterprise
• The issuer's profit promise
• Third-party promotion of the offering

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By Surojit Chatterjee, Chief Product Officer

2021 proved to be a breakout year for crypto with BTC price gaining almost 70% yoy, Defi hitting $150B in value locked, and NFTs emerging as a new category. Here’s my view through the crystal ball into 2022 and what it holds for our industry:

1. Eth scalability will improve, but newer L1 chains will see substantial growth — As we welcome the next hundred million users to crypto and Web3, scalability challenges for Eth are likely to grow. I am optimistic about improvements in Eth scalability with the emergence of Eth2 and many L2 rollups. Traction of Solana, Avalanche and other L1 chains shows that we’ll live in a multi-chain world in the future. We’re also going to see newer L1 chains emerge that focus on specific use cases such as gaming or social media.

2. There will be significant usability improvements in L1-L2 bridges — As more L1 networks gain traction and L2s become bigger, our industry will desperately seek improvements in speed and usability of cross-L1 and L1-L2 bridges. We’re likely to see interesting developments in usability of bridges in the coming year.

3. Zero knowledge proof technology will get increased traction — 2021 saw protocols like ZkSync and Starknet beginning to get traction. As L1 chains get clogged with increased usage, ZK-rollup technology will attract both investor and user attention. We’ll see new privacy-centric use cases emerge, including privacy-safe applications, and gaming models that have privacy built into the core. This may also bring in more regulator attention to crypto as KYC/AML could be a real challenge in privacy centric networks.

4. Regulated Defi and emergence of on-chain KYC attestation — Many Defi protocols will embrace regulation and will create separate KYC user pools. Decentralized identity and on-chain KYC attestation services will play key roles in connecting users’ real identity with Defi wallet endpoints. We’ll see more acceptance of ENS type addresses, and new systems from cross chain name resolution will emerge.

5. Institutions will play a much bigger role in Defi participation — Institutions are increasingly interested in participating in Defi. For starters, institutions are attracted to higher than average interest-based returns compared to traditional financial products. Also, cost reduction in providing financial services using Defi opens up interesting opportunities for institutions. However, they are still hesitant to participate in Defi. Institutions want to confirm that they are only transacting with known counterparties that have completed a KYC process. Growth of regulated Defi and on-chain KYC attestation will help institutions gain confidence in Defi.

6. Defi insurance will emerge — As Defi proliferates, it also becomes the target of security hacks. According to London-based firm Elliptic, total value lost by Defi exploits in 2021 totaled over $10B. To protect users from hacks, viable insurance protocols guaranteeing users’ funds against security breaches will emerge in 2022.

7. NFT Based Communities will give material competition to Web 2.0 social networks — NFTs will continue to expand in how they are perceived. We’ll see creator tokens or fan tokens take more of a first class seat. NFTs will become the next evolution of users’ digital identity and passport to the metaverse. Users will come together in small and diverse communities based on types of NFTs they own. User created metaverses will be the future of social networks and will start threatening the advertising driven centralized versions of social networks of today.

8. Brands will start actively participating in the metaverse and NFTs — Many brands are realizing that NFTs are great vehicles for brand marketing and establishing brand loyalty. Coca-Cola, Campbell’s, Dolce & Gabbana and Charmin released NFT collectibles in 2021. Adidas recently launched a new metaverse project with Bored Ape Yacht Club. We’re likely to see more interesting brand marketing initiatives using NFTs. NFTs and the metaverse will become the new Instagram for brands. And just like on Instagram, many brands may start as NFT native. We’ll also see many more celebrities jumping in the bandwagon and using NFTs to enhance their personal brand.

9. Web2 companies will wake up and will try to get into Web3 — We’re already seeing this with Facebook trying to recast itself as a Web3 company. We’re likely to see other big Web2 companies dipping their toes into Web3 and metaverse in 2022. However, many of them are likely to create centralized and closed network versions of the metaverse.

10. Time for DAO 2.0 — We’ll see DAOs become more mature and mainstream. More people will join DAOs, prompting a change in definition of employment — never receiving a formal offer letter, accepting tokens instead of or along with fixed salaries, and working in multiple DAO projects at the same time. DAOs will also confront new challenges in terms of figuring out how to do M&A, run payroll and benefits, and coordinate activities in larger and larger organizations. We’ll see a plethora of tools emerge to help DAOs execute with efficiency. Many DAOs will also figure out how to interact with traditional Web2 companies. We’re likely to see regulators taking more interest in DAOs and make an attempt to educate themselves on how DAOs work.

Thanks to our customers and the ecosystem for an incredible 2021. Looking forward to another year of building the foundations for Web3. Wagmi.

What can't Google do?
Seriously, nothing! Google rocks.
Google is a major player in online tools and services. We use it for everything, from research to entertainment.
Did I say entertain yourself?
Yes, with so many features and options, it can be difficult to fully utilize Google.

#1. Drive Google Mad

You can make Google's homepage dance if you want to be silly.
Just type “Google Gravity” into Google.com. Then select I'm lucky.
See the page unstick before your eyes!

#2 Play With Google Image

Google isn't just for work.
Then have fun with it!
You can play games right in your search results. When you need a break, google “Solitaire” or “Tic Tac Toe”. 

#3. Do a Barrel Roll

Need a little more excitement in your life? Want to see Google dance?
Type “Do a barrel roll” into the Google search bar.
Then relax and watch your screen do a 360. 

#4  No Internet?  No issue!

This is a fun trick to use when you have no internet.
If your browser shows a “No Internet” page, simply press Space.
Boom!
We have dinosaurs! Now use arrow keys to save your pixelated T-Rex from extinction.

#5 Google Can Help

Play this Google coin flip game to see if you're lucky.
Enter “Flip a coin” into the search engine.
You'll see a coin flipping animation. If you get heads or tails, click it. 

#6. Think with Google

My favorite Google find so far is the “Think with Google” website.
Think with Google is a website that offers marketing insights, research, and case studies.
I highly recommend it to entrepreneurs, small business owners, and anyone interested in online marketing. 

#7. Google Can Read Images!

This is a cool Google trick that few know about.
You can search for images by keyword or upload your own by clicking the camera icon on Google Images.
Google will then show you all of its similar images.

#8. Modify the Google Logo!

Clicking on the “I'm Feeling Lucky” button on Google.com takes you to a random Google Doodle.
Each year, Google creates a Doodle to commemorate holidays, anniversaries, and other occasions.

#9. What is my IP?

Simply type “What is my IP” into Google to find out.
Your IP address will appear on the results page.

#10. Send a Self-Destructing Email With Gmail, 

Create a new message in Gmail. Find an icon that resembles a lock and a clock near the SEND button. That's where the Confidential Mode is.
By clicking it, you can set an expiration date for your email. Expiring emails are automatically deleted from both your and the recipient's inbox.

#11. Blink, Google Blink!

This is a unique Google trick.
Type “blink HTML” into Google. The words “blink HTML” will appear and then disappear.
The text is displayed for a split second before being deleted.
To make this work, Google reads the HTML code and executes the “blink” command. 

#12. The Answer To Everything

This is for all Douglas Adams fans.
The answer to life, the universe, and everything is 42, according to Google.
An allusion to Douglas Adams' Hitchhiker's Guide to the Galaxy, in which Ford Prefect seeks to understand life, the universe, and everything.

#13. Google in 1998

It's a blast!
Type “Google in 1998” into Google. "I'm feeling lucky"
You'll be taken to an old-school Google homepage.
It's a nostalgic trip for long-time Google users. 

#14. Scholarships and Internships

Google can help you find college funding!
Type “scholarships” or “internships” into Google.
The number of results will surprise you. 

#15. OK, Google. Dice!

To roll a die, simply type “Roll a die” into Google.
On the results page is a virtual dice that you can click to roll. 

#16. Google has secret codes!

Hit the nine squares on the right side of your Google homepage to go to My Account. Then Personal Info.
You can add your favorite language to the “General preferences for the web” tab. 

#17. Google Terminal 

You can feel like a true hacker.
Just type “Google Terminal” into Google.com. "I'm feeling lucky"
Voila~!
You'll be taken to an old-school computer terminal-style page.
You can then type commands to see what happens.

Have you tried any of these activities? Tell me in the comments.

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