Origin and details of the Howey Test #3
Description
Great site! I discovered it by way of the r/EthFinance daily.
Under the "Defining the Law" section, it would be nice to add a bit more detail on the Howey Test. Here's a proposal of mine.
The Howey Test is used to determine whether a transaction qualifies as an "investment contract." This so-called test gets its name from the 1946 Supreme Court case of SEC versus the W.J. Howey Company. The case concerned the sale of land with citrus groves owned by the Howey Company to investors in Florida. Under the business model, the investors would buy the land and then lease it back to the Howey Company for management and operations. In return, the Howey Company shared profits with the investors. The Howey Company did not register the transactions as securities at that time, leading to the SEC's intervention and then to the landmark Supreme Court case.
The US Supreme Court ruled that Howey's leaseback arrangements were indeed investment contracts and, therefore, subject to the registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. This case established a framework for testing whether an asset can be classified as security that is still in use today. In brief, if there is an investment of money in a common enterprise and the expectation of profits derived from the efforts of others, then that investment is probably a security.
The Howey Test is not the only method for determining whether an investment is a security, it is however, the most well known.