The Howey test is a legal test used to determine whether a particular investment is a security. The test was established by the Supreme Court in 1946 in the case of SEC v. W.J. Howey Co. The Howey test is used to determine whether an investment meets the definition of a security, and therefore subject to regulation by the Securities and Exchange Commission (SEC). In this essay, we will explore the history and elements of the Howey test, as well as its application to modern investments such as cryptocurrencies.
The Howey test can be described in this flowchart.
graph TD;
A[Investment of Money] --> B[Expectation of Profits];
B --> C[Common Enterprise];
C --> D[Profits from the Efforts of a Third Party];
D --> E[Security];
E --> F{Subject to SEC Regulation?};
F -->|Yes| G[Compliance with SEC Regulations];
F -->|No| H[Exempt from SEC Regulations];
This flowchart describes the four criteria that must be met for an investment to be considered a security under the Howey test: (1) an investment of money, (2) an expectation of profits, (3) a common enterprise, and (4) profits generated from the efforts of a third party. If an investment meets all four criteria, it is considered a security and subject to SEC regulation. If it does not meet all four criteria, it may be exempt from SEC regulation.