What is the Howey Test and How Does It Affect Cryptocurrencies

February 19, 2018 by Adrian Thorpe

Based on where you live in the world, your respective government will have in place some form of system in place, and one usually set in law that determines if any transaction made is determined to be an investment or an investment contract.

As cryptocurrencies are relatively new, most countries do not have any specific laws and regulations in place regarding ICO’s and cryptocurrencies in general.

However, that is not the case in the USA, for they do surprisingly have an Act that dates back to 1933 that covers investments and investment contracts which can be used to determine if a cryptocurrency is indeed an investment or not.

The Securities Act of 1933 along with the Securities Exchange Act of 1934 both have something known as the Howey Test that became part of those two Acts in 1946 that can be used to determine if a transaction becomes an investment and that test was created by the Supreme Court.

As such, if you are wondering about the legality of any cryptocurrency, coin or token you may be about to buy, and whether the company or organisation launching them needs to be licensed in the USA for the purposes of offering them to people living in America, then please read on for an overview of how the Howey Test has been designed.

Determining If a Cryptocurrency, Coin or Token is an Investment

It was the outcome of a court case, SEC V. Howey that was to become part of determining whether any transaction would be determined as an investment and a test was developed using the criteria below.

A transaction would be determined as being an investment if there is an investment of money and there some form of expectation of profits being made from the investment.

Also the investment of money is in a common enterprise and that any profit comes from the efforts of a promoter or any third party.

Therefore as someone who may be interested in buying into for example an Initial Coin Offering or a Token or Coin Generation Event, you should take a look at the idea or business surrounding it and then find the answers to those four questions above.

If the ICO or Coin or Token Generation Event is one that does have some form of expectation of a profit and the profit is going to be make by any third party or third parties then it will probably end up being determine as being an investment.

Ultimately if any Initial Coin Offering to Token or Coin Generation Event is determined as being an investment as determined by the Howey Test then it must be registers as being so in the USA.

However, there is one way that could be used to circumvent that legal requirement and that is simply not to make available the ICO or Coin or Token Generation Event to people who are living in the USA, and many that coins and tokens and cryptocurrencies that do launch now require people buying into them to send in copies of their identification documents proving they are not in the USA.

Pros and Cons of Buying Into an ICO

The is a very high risk factor associated with buying into any one cryptocurrency, coin or token that is being launched, for there is never any guarantees of them becoming a success and they may not be fully embraced by the market sector that they are aimed at.

As such you do need to be aware of those risks for it is possible to lose the entire value of the amount of cash you use to buy those cryptocurrencies, coins and tokens with.

However, having said that, if you do come across any coin or token or soon to be launched cryptocurrency that does have a unique idea behind it, then there is a very good chance that the value of those coins, tokens or cryptocurrencies can and will rise.

Also, it is worth nothing that in exchange for the risk element associated with buying into any ICO or Token Generation Event early a bonus can be secured, and that bonus will often take the form of an additional percentage of coins or tokens being credited to your digital wallet when buying them early.

The percentage of tokens or coins you will be credited with can and will vary in value depending on which ones you are buying into, but always ensure you are not simply being blinded by the value of those bonuses.