Howey Test Assessment Tool
Howey Test Assessment
Answer the four questions below to determine if a cryptocurrency token might qualify as a security under the SEC's Howey Test.
1. Is money being invested?
2. Is there a common enterprise?
3. Do you expect to make a profit?
4. Are profits driven by the efforts of others?
How the Howey Test Works
The Howey Test determines if a cryptocurrency is a security based on four key factors:
- 1. Money invested Required
- 2. Common enterprise Required
- 3. Expectation of profit Required
- 4. Profits from others' efforts Required
If all four conditions are met, the token is likely considered a security under U.S. law.
Why This Matters
If a token qualifies as a security, it must:
- Register with the SEC
- Comply with securities regulations
- Potentially face penalties for non-compliance
Current SEC position: Approximately 95% of crypto tokens are likely securities according to SEC Chairman Gary Gensler.
Token Assessment Result
If all four conditions of the Howey Test are met, your token is likely considered a security. This means it would require registration with the SEC or an exemption from securities laws. The SEC has been actively enforcing these regulations, with over $2.8 billion in penalties collected from crypto-related cases between 2013 and 2022.
Recommendation:
To avoid securities classification, focus on developing genuine utility, decentralize your network, and avoid marketing to investors. Many projects that successfully transitioned to decentralized networks (like Polygon) have avoided SEC action.
When you buy a cryptocurrency, are you buying a tool-or are you buying a bet? That’s the question the SEC asks every time it looks at a new token. The answer isn’t about the tech. It’s about the Howey Test. This 78-year-old legal rule, born from a Florida citrus grove scam, now decides whether your favorite crypto coin is a security-and whether the whole project needs to follow federal securities laws.
What the Howey Test Actually Says
The Howey Test comes from a 1946 U.S. Supreme Court case: SEC v. W.J. Howey Co. Back then, people were buying plots of land in citrus groves. They didn’t plan to grow oranges themselves. They paid upfront, trusting Howey Company to plant, harvest, and sell the fruit-then split the profits. The SEC stepped in and said: this isn’t a land sale. It’s an investment contract. And under federal law, investment contracts are securities.
The Court laid out four simple questions to decide if something is a security:
- Is money being invested? You hand over cash, crypto, or anything of value.
- Is there a common enterprise? Your success is tied to others’ efforts. Are you in it together with the team behind the project?
- Do you expect to make a profit? Are you buying because you think the price will go up-not because you plan to use the token?
- Are profits driven by the efforts of others? Is the project’s value rising because the founders are building, marketing, or upgrading it-not because users are using it?
If all four answers are yes? That’s a security. And if it’s a security, the project must register with the SEC or qualify for an exemption. No registration? That’s illegal under U.S. law.
Why the SEC Cares About Crypto
Before 2017, no one thought to apply this 1940s rule to digital assets. Then came the DAO Report. The SEC analyzed a token sale called DAO (Decentralized Autonomous Organization) and said: Yes, this is a security. Investors put in ETH, expected returns from the DAO’s projects, and relied on the team to make it work. Classic Howey.
Since then, the SEC has gone after over 70 crypto projects. They’ve collected $2.8 billion in penalties from crypto-related cases between 2013 and 2022. Why? Because they see a pattern: tokens sold as "utility" but marketed like stocks. Promoters hype them on Twitter. They promise future features. They control the supply. They update the code. And investors buy hoping for a quick flip.
Chairman Gary Gensler has been blunt: "About 95 percent of the tokens out there probably are securities." That’s not a guess. It’s a legal stance based on how these tokens are sold and used.
Bitcoin and Ethereum: Why They’re Different
Not every crypto fails the Howey Test. Bitcoin? The SEC says it doesn’t qualify. Why? Because there’s no central team driving its value. No CEO. No roadmap. No marketing campaign. People mine it. People trade it. But no one is "efforting" to make Bitcoin’s price go up. It’s decentralized by design.
Ethereum is trickier. In 2018, former SEC official William Hinman said Ethereum’s network was "sufficiently decentralized"-so current sales weren’t securities. But that wasn’t a formal rule. The SEC hasn’t officially declared Ethereum a non-security. That’s why many exchanges still treat ETH as a security for compliance purposes.
The key difference? Bitcoin’s network runs on code, not people. Ethereum’s early sales looked like investments-but now, with thousands of validators, stakers, and developers, it’s harder to pin its value on one group.
XRP: The Case That Split the Room
One case changed everything: SEC vs. Ripple Labs.
The SEC sued Ripple in 2020, claiming XRP was an unregistered security. They argued Ripple’s executives sold XRP to investors while promising to grow the network. That’s textbook Howey.
In July 2023, Judge Analisa Torres ruled: It depends. XRP sold directly to institutions? Yes, that was a security. XRP sold on public exchanges? No, because buyers didn’t know they were buying from Ripple-they were just trading on Coinbase or Binance.
This ruling didn’t say XRP is a non-security. It said context matters. Who’s selling? To whom? When? How? That’s the new reality: the Howey Test isn’t a yes/no button. It’s a sliding scale.
What Projects Are Getting Crushed
Startups that raised millions in ICOs are now paying the price. Kik Interactive raised $100 million in 2017 with its Kin token. They said it was for chat apps. The SEC said: "No, you sold it as an investment." Kik settled for $30 million in 2020.
Blockstack raised $23 million in a SAFT (Simple Agreement for Future Tokens) in 2019. They thought they were following the rules. The SEC said: "That’s not a legal exemption." They fined them $27 million.
What do these projects have in common? They had a team that stayed involved. They marketed to investors. They promised future utility. And they didn’t decentralize fast enough.
Compare that to Polygon (MATIC). They started centralized. But over 18 months, they handed control to the community. Validators took over. Governance shifted. The SEC hasn’t touched them. Why? Because now, profits aren’t coming from the founders. They’re coming from the network.
Why This Is So Confusing
The Howey Test was never meant for blockchain. It was written for oranges. Now we’re using it for tokens, DAOs, and DeFi protocols. The problem? It doesn’t have clear thresholds.
How decentralized is "decentralized"? There’s no number. No metric. No checklist. The SEC’s 2019 framework says: "The more decentralized, the less likely it’s a security." But it doesn’t say how much.
That’s why 73% of crypto projects struggle to prove they’re decentralized enough, according to Chainalysis. Developers spend months trying to figure out: Do we need a lawyer? How many nodes do we need? How many users? When can we launch?
Legal advice costs $150,000 to $300,000. That’s not a cost. It’s a barrier. Small teams can’t afford it. That’s why U.S. crypto venture funding dropped 37% in 2023, according to PitchBook.
Who’s Winning and Who’s Losing
The U.S. is losing ground. In 2021, it accounted for 32% of global crypto activity. By 2023, that fell to 24%. Why? Because countries like Switzerland, Singapore, and Japan created clear rules. They don’t use the Howey Test. They use frameworks that distinguish between utility tokens and securities from day one.
Meanwhile, 47% of U.S. crypto startups are now considering moving overseas, according to Electric Capital. Why risk a lawsuit when you can launch in Dubai or Zug?
But investors aren’t all against the SEC. A Grayscale survey found 58% of U.S. crypto investors support regulation. They’ve seen the collapses-Terra, FTX, Celsius. They don’t want another $2.4 billion scam. The Howey Test, for them, is a shield.
What Comes Next?
The SEC isn’t backing down. Their 2023 Strategic Plan says the Howey Test will remain "central" to crypto regulation. But the courts are pushing back. Judge John Koeltl, in the Uniswap case, called the legal questions "novel." He didn’t rule against the SEC-but he didn’t give them a blank check either.
Meanwhile, Congress is stalled. The Lummis-Gillibrand bill, which would’ve created a safe harbor for decentralized networks, died in committee. The Blockchain Association says 78% of industry leaders want a "safe harbor" period-time for projects to become decentralized before being treated as securities.
For now, the only real rule is this: If you’re selling a token and you’re still involved-marketing, updating, controlling supply-you’re probably selling a security. If you’re not involved anymore, and the network runs on its own? You might be okay.
But there’s no guarantee. The SEC doesn’t publish a checklist. The courts don’t give clear answers. And the law was written before anyone knew what a blockchain was.
What You Should Do
If you’re an investor: Ask yourself why you bought. Are you hoping for a return? Or are you using the token to access a service? If it’s the first-you’re likely holding a security. Know the risks.
If you’re building a project: Don’t promise returns. Don’t control the supply. Don’t market to investors. Build real utility. Let the community take over. Document your decentralization. Hire a lawyer who’s handled SEC crypto cases-not just a general attorney.
If you’re just curious: Understand that Bitcoin and Ethereum survived the Howey Test because they don’t rely on a team. Everything else? It’s a gray zone. And the SEC is watching.
The Howey Test isn’t going away. It’s not broken. It’s just old. And right now, it’s the only tool we have to protect investors in a wild, fast-moving market. Whether that’s enough-or fair-is the question no one has answered yet.
Is Bitcoin a security under the Howey Test?
No. The SEC has explicitly stated that Bitcoin does not meet the Howey Test criteria. There is no central team or entity whose efforts drive Bitcoin’s value. Its network is fully decentralized, with mining and validation distributed across thousands of independent participants. Buyers don’t invest expecting profits from someone else’s work-they participate as users or miners.
Can a crypto token be legal without SEC registration?
Yes-if it doesn’t qualify as a security under the Howey Test. Bitcoin and, arguably, Ethereum (in its current state) fall into this category. Projects can also avoid registration if they qualify for an exemption, like Regulation D (private placements) or Regulation A+ (mini-IPOs). But if a token meets all four prongs of the Howey Test, registration is required by law.
Why does the SEC focus on token sales and not just trading?
Because the Howey Test applies to the initial sale-the moment someone invests money expecting profits from others’ efforts. Once a token is widely traded on exchanges and no longer tied to the original promoter’s actions, it may no longer be considered a security. That’s why the SEC sued Ripple over its institutional sales of XRP but didn’t target exchange trades.
What happens if a project ignores the Howey Test?
The SEC can sue. They’ve done it dozens of times. Penalties include fines (like Kik’s $30 million), forced token buybacks, and bans on future fundraising. In some cases, founders face personal liability. Ignoring the test doesn’t make it go away-it just makes the consequences worse.
Is there a way to design a crypto project to avoid the Howey Test?
Yes. Focus on utility, not speculation. Launch the network with real use cases from day one. Avoid marketing to investors. Don’t control the token supply. Gradually hand over governance to the community. Build a decentralized infrastructure where no single group can influence the token’s value. Polygon did this successfully. Many others haven’t.
Bhavna Suri
November 3, 2025 AT 00:12This is so confusing. Why do we even need old laws for new tech? Just let people trade.
It's not like anyone's getting hurt.
Elizabeth Melendez
November 3, 2025 AT 12:27Okay but let’s be real - the Howey Test isn’t broken, it’s just being applied to something it never imagined. Like using a hammer to fix a smartphone. But honestly? I get why the SEC’s doing it. So many crypto projects are just pump-and-dumps in hoodies. I mean, if you’re selling a token and your Discord is full of ‘to the moon’ memes and you’re the only one with the private keys… yeah, that’s a security. No shame in that. The problem isn’t the law - it’s the people who treat blockchain like a casino with a whitepaper. We need clarity, not chaos. And yes, I’m tired of hearing ‘but Bitcoin!’ - it’s not the same. Bitcoin’s a digital gold rush. Everything else? Still trying to find its feet. Let’s stop pretending we’re all decentralized when half of us are still waiting for the team to drop the next update.
Also - Polygon did it right. They didn’t promise riches. They built tools. And now the community runs it. That’s the model. Not the ‘we’ll make a better Dogecoin’ pitch. 🙏
Phil Higgins
November 4, 2025 AT 07:42The Howey Test is a mirror. It reflects not the technology, but the human intention behind it. A tool becomes a security not because of its code, but because of the promises whispered around it. The orange grove didn’t fail because of soil quality - it failed because people believed in someone else’s labor. Today, we believe in whitepapers, influencers, and roadmap animations. We’ve traded soil for smart contracts, but the psychology remains identical. Decentralization isn’t a technical state - it’s an ethical one. When no single hand holds the reins, when value emerges from participation rather than promotion - then, and only then, does the market become truly free. The SEC isn’t fighting innovation. It’s fighting illusion.
And perhaps that’s the most human thing of all.
Genevieve Rachal
November 4, 2025 AT 09:26Ugh. Another crypto apologist pretending the SEC is the villain. Look at Kik. They raised $100M pretending their token was for messaging. It wasn’t. It was a Ponzi dressed in blockchain glitter. And now you wanna cry about ‘regulation killing innovation’? Bro. If your business model depends on people not knowing they’re buying a security, you deserve to get fined. And Ethereum? Don’t act like it’s safe. The team still controls core upgrades. The ‘decentralized’ label is just marketing. The SEC’s not wrong - you’re just mad they’re catching up to your shady hustle.
Also - Bitcoin? Yeah, fine. But you know what’s more decentralized than Bitcoin? A rock. At least a rock doesn’t pretend to be something it’s not.
Eli PINEDA
November 5, 2025 AT 05:42wait so if i buy a token and i dont even know who made it… is it still a security? like if i buy it on binance and never looked at the website? i’m so confused now