What is the Howey test, and how does it decide if a crypto token is a security?

What is the Howey test?

US securities law lists many things that count as a security: shares and bonds, but also looser arrangements such as an investment contract¹. The Supreme Court defined that term in SEC v. W.J. Howey Co., 328 U.S. 293, decided in 1946¹.

As the SEC restates it, an investment contract is any contract, transaction or scheme in which a person invests money in a common enterprise and reasonably expects profits to come from the efforts of others¹. If a deal fits that description, it is a security, whatever it is called, and the rules for selling securities apply.

The case itself was about citrus groves. The W.J. Howey Company owned citrus land in Lake County, Florida, planted about 500 acres a year in the years before the case, kept half and offered the other half to the public⁶. Buyers were also offered a service contract, usually for 10 years with no option to cancel, that gave Howey-in-the-Hills Service, Inc. full control over growing, harvesting and marketing the crop⁶. Most buyers did not live in Florida and were business and professional people who lacked the knowledge, skill and equipment to grow citrus themselves⁶. They were paying for someone else's work to make them money.

The Supreme Court heard the case on May 2, 1946 and decided it on May 27, 1946. Justice Murphy, writing for the Court, found all the elements of a profit-seeking business venture: investors put up the capital and shared the profits, while the promoters ran the enterprise, so the arrangements were investment contracts whatever they were called. Justice Frankfurter dissented, and Justice Jackson took no part⁶. The Court's own wording of the test refers to profits "solely from the efforts of the promoter or a third party"⁶; the SEC's modern restatement speaks of profits from the efforts of others¹.

What are the parts of the Howey test?

The SEC breaks the test into three elements¹. All of them have to be present for a deal to be an investment contract.

Why does a 1946 case decide crypto questions?

Because the test is about the economic reality of a deal, not its technology. When a project sells a token to raise money and promises that its team will work to make the token more valuable, buyers are doing what Howey's land buyers did: paying for a stake in someone else's effort. The SEC says that in that situation the offer must be registered under the Securities Act or fit an exemption¹.

The same token can look very different once a network is running. If a token's value comes from a working system and from supply and demand, rather than from a promoter's promises, the SEC now places it in a non-security category such as a digital commodity². Our explainer on SEC vs CFTC covers which regulator then takes over.

How did the SEC apply Howey to crypto in 2026?

On March 17, 2026 the SEC published an interpretation of how securities laws apply to crypto-assets, which the CFTC joined³. It took effect on March 23, 2026¹. It sorts crypto-assets into digital commodities, digital collectibles, digital tools, payment stablecoins and digital securities, and says only the last group is made up of securities².

• Investment contracts can attach and detach. A token that is not a security can still be sold as part of an investment contract when the issuer makes promises of essential managerial work; that contract ends once the issuer has fulfilled those promises or failed to fulfil them².
• Some network activities are covered directly. The SEC says protocol mining does not involve the offer and sale of a security, and the release also addresses staking, wrapping and airdrops¹.
• Older guidance is replaced. The interpretation supersedes the SEC staff's April 2019 framework for analysing digital assets as investment contracts¹.
• Howey still rules. The SEC states that the interpretation does not replace the Howey test, which remains binding legal precedent¹.

What happens when a token is part of an investment contract?

Then securities rules apply to the offer: the issuer must register it with the SEC or rely on an exemption¹. That is why the label matters so much to projects: registration brings disclosure duties, and an unregistered offer with no exemption breaks the rules.

The SEC is also proposing new paths. On August 18, 2026 it proposed Regulation Crypto Assets, which would add two exemptions, one for raising up to $5 million over four years and one for up to $75 million every 12 months, plus a conditional safe harbour from investment-contract status once an issuer has completed or permanently stopped its essential managerial efforts⁴. As of October 2026 this is a proposal, not a final rule.

What do people get wrong about the Howey test?