What it is
The Howey test is a legal framework derived from a 1946 US Supreme Court case (SEC v. W.J. Howey Co.). It defines an "investment contract," and therefore a security, as a transaction involving four elements: an investment of money, in a common enterprise, with a reasonable expectation of profits, to be derived solely from the entrepreneurial or managerial efforts of others.
The Securities and Exchange Commission (SEC) frequently applies the Howey test to digital assets to determine if they are securities. If a crypto token meets all four prongs of the test, the SEC considers it an unregistered security, subjecting it to stringent federal securities laws. This classification dictates regulatory oversight and can lead to enforcement actions against issuers.
Why it matters
The Howey test is the primary legal tool used to determine if a crypto token is a security, profoundly affecting its regulatory status and market viability.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice