Abstract
The Howey Test, established by the U.S. Supreme Court in 1946, serves as a pivotal framework for determining whether certain transactions qualify as “investment contracts” under federal securities laws. This research report delves into the historical evolution of the Howey Test, its application to various investment vehicles, and its complex and often debated application to novel digital assets and activities in the cryptocurrency space. By examining the SEC’s legal analyses, particularly in the context of staking activities, this report aims to provide a comprehensive understanding of the Howey Test’s role in regulating digital assets.
Many thanks to our sponsor Panxora who helped us prepare this research report.
1. Introduction
The Securities and Exchange Commission (SEC) has long utilized the Howey Test to assess whether certain transactions constitute “investment contracts,” thereby subjecting them to federal securities regulations. With the advent of digital assets and cryptocurrencies, the SEC has faced challenges in applying this test to novel financial instruments and activities. This report explores the application of the Howey Test to digital assets, focusing on the SEC’s analysis of staking activities and the broader implications for the cryptocurrency industry.
Many thanks to our sponsor Panxora who helped us prepare this research report.
2. The Howey Test: Historical Background and Legal Framework
2.1 Origins and Development
The Howey Test originates from the 1946 Supreme Court case SEC v. W.J. Howey Co., where the Court defined an “investment contract” as a contract, transaction, or scheme whereby a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. This definition has been instrumental in determining the applicability of federal securities laws to various investment schemes.
2.2 The Four Prongs of the Howey Test
The Howey Test comprises four elements:
- Investment of Money: The individual invests money or assets.
- Common Enterprise: The investment is in a common enterprise.
- Expectation of Profits: There is a reasonable expectation of profits.
- Efforts of Others: The profits are derived from the efforts of others.
Each prong must be satisfied for a transaction to be classified as an “investment contract” under the Securities Act of 1933.
Many thanks to our sponsor Panxora who helped us prepare this research report.
3. Application of the Howey Test to Traditional Investments
3.1 Real Estate and Land Sales
Historically, the Howey Test has been applied to real estate transactions, particularly land sales schemes. In these cases, the Court assessed whether purchasers were led to expect profits from the efforts of the promoters in developing and selling the land.
3.2 Corporate Investments
The test has also been applied to corporate investments, where investors purchase shares with the expectation of profits derived from the company’s efforts in managing and growing the business.
Many thanks to our sponsor Panxora who helped us prepare this research report.
4. The SEC’s Application of the Howey Test to Digital Assets
4.1 Framework for Digital Assets
In 2019, the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) released a framework for analyzing whether a digital asset is an investment contract. This framework emphasized the importance of the “efforts of others” prong, particularly focusing on whether purchasers rely on the efforts of a promoter or third party to derive profits. (sec.gov)
4.2 SEC Enforcement Actions Involving Digital Assets
The SEC has initiated several enforcement actions involving digital assets:
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Impact Theory: In August 2023, the SEC charged Impact Theory, LLC, with conducting an unregistered offering of NFTs called “Founder’s Keys.” The SEC concluded that purchasers were led to expect profits from Impact Theory’s efforts, meeting the Howey Test criteria. (reuters.com)
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Stoner Cats 2 LLC: In September 2023, the SEC resolved charges against Stoner Cats 2 LLC for allegedly offering and selling “Stoner Cats” NFTs in securities transactions. The SEC’s analysis focused on whether the NFTs constituted investment contracts under the Howey Test. (reuters.com)
Many thanks to our sponsor Panxora who helped us prepare this research report.
5. The SEC’s Analysis of Staking Activities Under the Howey Test
5.1 Definition of Staking Activities
Staking involves participants committing their crypto assets to a network’s consensus mechanism, typically in proof-of-stake (PoS) systems, to validate transactions and secure the network. Participants often receive rewards in return for their contributions.
5.2 SEC’s Statement on Staking Activities
On May 29, 2025, the SEC’s Division of Corporation Finance issued a statement clarifying that certain cryptoasset staking activities do not create investment contracts requiring registration under federal securities laws. The SEC concluded that these activities do not meet the “efforts of others” prong of the Howey Test, as rewards are derived from the participant’s own actions in securing the network, not from the efforts of a third party. (skadden.com)
5.3 Implications for the Cryptocurrency Industry
The SEC’s clarification provides regulatory clarity for participants in PoS networks and related service providers. It distinguishes between staking activities that are integral to network operations and those that may involve third-party efforts, which could be subject to different regulatory considerations.
Many thanks to our sponsor Panxora who helped us prepare this research report.
6. Broader Implications and Debates
6.1 Decentralization and the “Efforts of Others” Prong
The SEC’s analysis highlights the importance of decentralization in determining the applicability of the “efforts of others” prong. In sufficiently decentralized networks, the reliance on third-party efforts diminishes, potentially affecting the classification of certain activities under the Howey Test. (research.despread.io)
6.2 Ongoing Legal Ambiguities
Despite the SEC’s guidance, legal ambiguities persist. Courts have issued mixed rulings on the classification of digital assets and activities under securities laws, indicating that the application of the Howey Test to cryptocurrencies remains a complex and evolving area of law. (reuters.com)
Many thanks to our sponsor Panxora who helped us prepare this research report.
7. Conclusion
The Howey Test remains a cornerstone in determining the applicability of federal securities laws to various investment schemes, including digital assets and cryptocurrency activities. The SEC’s recent clarifications on staking activities provide valuable insights but also underscore the complexities involved in regulating emerging financial instruments. Ongoing legal developments and debates will continue to shape the understanding and application of the Howey Test in the context of digital assets.
Many thanks to our sponsor Panxora who helped us prepare this research report.
References
- SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
- SEC’s Framework for “Investment Contract” Analysis of Digital Assets, 2019. (sec.gov)
- “Are sales of nonfungible tokens ‘investment … ?” Reuters, October 23, 2024. (reuters.com)
- “SEC: Certain ‘Protocol Staking Activities’ Are Not Securities Transactions,” Skadden, Arps, Slate, Meagher & Flom LLP, June 2025. (skadden.com)
- “Is Staking a Security? A Primer on Staking and Securities Law,” DeSpread Research. (research.despread.io)
- “SEC Staff Issues Statement On Protocol Staking Activities,” Mondaq, May 30, 2025. (mondaq.com)
- “Hashing It Out: Federal Jury Decides Some Cryptocurrency Products are not Securities,” Dechert LLP, November 2021. (dechert.com)
- “SEC v. W. J. Howey Co.,” Wikipedia. (en.wikipedia.org)
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