What is the Howey test?

What do orange groves have to do with crypto? The Howey test comes from SEC v. W.J. Howey Co., a case about investments in citrus groves that the US Supreme Court decided in 1946. Today it’s also used to assess deals involving tokens.

The court doesn’t only look at what someone is buying, but at the economic substance of the deal. In its modern form, the test looks at four elements together:

• An investment of money or other value.
• Participation in a common enterprise.
• A reasonable expectation of profit.
• That profit depending on the essential managerial efforts of others.

Think of a team that sells tokens to fund an app and promises that its work will generate profits for buyers. An offering like that may be examined as an investment contract. Someone’s mere hope that a token’s price will rise isn’t enough on its own to meet the test.

Why it matters

If a deal is deemed an investment contract, it may trigger registration requirements (or the need for a legal exemption) and disclosure obligations under US law. This mainly concerns issuers and platforms, but the consequences can reach holders too, for example if an exchange restricts trading in a token.

We always separate the asset itself from the deal under which it was offered. How it was sold, what the organizers promised and whose efforts the profits are expected to come from all matter. Calling something a “utility token” doesn’t settle the legal question by itself.

In Greece

The Howey test isn’t a Greek or European rule, and it’s not an exam that anyone holding crypto has to “pass.” The EU applies a different framework: MiCA for the crypto-assets it covers, and financial instruments legislation, including MiFID II, for those that fall into that category.

Living in Greece doesn’t rule out every US law issue when there’s a relevant connection to the United States. The Howey test also doesn’t determine how gains are taxed in Greece. A specific offering or transaction requires a personalized legal assessment.