Howey Test Complicated?
As discussed in our previous article, there is no simple answer to the question that whether a certain crypto asset is to be considered a security or not. However, things might have been simplified a bit after the decision of the U.S Supreme Court in the case of SEC v WJ. Howey. In this case, the U.S Supreme Court laid down a test known as the Howey Test. Under Howey Test, a crypto asset will be considered a security where it fulfills the following three conditions.
- Crypto asset involves an investment of money. This includes both investment in fiat currency and cryptocurrency investment.
- The investment is made in a common enterprise.
- The investment is made with an expectation of profit.
This may seem like a pretty simple test, however, if we start applying this test to different facts and cases it will soon become very complicated. In this regard, the remarks from the Director of SEC Corporate Finance are very important. It has been pointed out by the Director that while the test may have simplified things but on the other hand it is to be noted this process of applying the Howey Test to the crypto assets might consume a lot of time and resources. He further pointed out that even if the investment advisers spend the time and apply the Howey Test to a crypto asset there will still be no assurance that the Howey analysis prepared by the investment adviser will not be second-guessed by the SEC.
In the recent past, with the enforcement actions taken by the SEC in light of the Howey Test, many of the issuers have now started checking and assessing whether or not their crypto coins and tokens fall under the category of securities. This has also led the issuers to take precautionary measures with regard to complying with the securities laws.
Even though many of the issuers have started complying with the federal securities laws, there are still no reports of any such issuers getting registered with the SEC by way of filling out the registration statements. The regulatory authorities on the other hand are still trying to approach the issuers of the crypto coins and tokens urging them to get registered pursuant to Regulation A+.
Many of the issuers have now started issuing their coins and tokens by adopting a way that might qualify them for an exemption from registering with the SEC. A such exemption might relieve the burden from the investment advisers as once exempted, they will not have to determine if a certain crypto asset is a security or not. Once an exemption has been granted the adviser can safely assume that such an asset is a security as the issuer has structured the offering in a manner that will exempt the same from registering with the SEC.
However, on the other hand, it would appear that an adviser is required to perform its own “Howey test” analysis if it finds that the coins and tokens have not been offered in accordance with an effective registration statement or in accordance with an exemption from the Securities Act registration requirements.