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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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Since the pandemic, I've worked from home. It’s been +2 years (wow, time flies!) now, and during this time I’ve learned a lot. My 4 remote work lessons.

I work in a remote distributed team. This team setting shaped my experience and teachings.

Isolation ("I miss my coworkers")

The most obvious point. I miss going out with my coworkers for coffee, weekend chats, or just company while I work. I miss being able to go to someone's desk and ask for help. On a remote world, I must organize a meeting, share my screen, and avoid talking over each other in Zoom - sigh!

Social interaction is more vital for my health than I believed.

Online socializing stinks

My company used to come together every Friday to play Exploding Kittens, have food and beer, and bond over non-work things.

Different today. Every Friday afternoon is for fun, but it's not the same. People with screen weariness miss meetings, which makes sense. Sometimes you're too busy on Slack to enjoy yourself.

We laugh in meetings, but it's not the same as face-to-face.

Digital social activities can't replace real-world ones

Improved Work-Life Balance, if You Let It

At the outset of the pandemic, I recognized I needed to take better care of myself to survive. After not leaving my apartment for a few days and feeling miserable, I decided to walk before work every day. This turned into a passion for exercise, and today I run or go to the gym before work. I use my commute time for healthful activities.

Working from home makes it easier to keep working after hours. I sometimes forget the time and find myself writing coding at dinnertime. I said, "One more test." This is a disadvantage, therefore I keep my office schedule.

Spend your commute time properly and keep to your office schedule.

Remote Pair Programming Is Hard

As a software developer, I regularly write code. My team sometimes uses pair programming to write code collaboratively. One person writes code while another watches, comments, and asks questions. I won't list them all here.

Internet pairing is difficult. My team struggles with this. Even with Tuple, it's challenging. I lose attention when I get a notification or check my computer.

I miss a pen and paper to rapidly sketch down my thoughts for a colleague or a whiteboard for spirited talks with others. Best answers are found through experience.

Real-life pair programming beats the best remote pair programming tools.

Lessons Learned

Here are 4 lessons I've learned working remotely for 2 years.

• Socializing is more vital to my health than I anticipated.

• Digital social activities can't replace in-person ones.

• Spend your commute time properly and keep your office schedule.

• Real-life pair programming beats the best remote tools.

Conclusion

Our era is fascinating. Remote labor has existed for years, but software companies have just recently had to adapt. Companies who don't offer remote work will lose talent, in my opinion.

We're still figuring out the finest software development approaches, programming language features, and communication methods since the 1960s. I can't wait to see what advancements assist us go into remote work.

I'll certainly work remotely in the next years, so I'm interested to see what I've learnt from this post then.

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