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What Is the Howey Test? - FindLaw http://consumer.findlaw.com/securities-law/what-is-the-howey-test.html http://consumer.findlaw.com/securities-law/what-is-the

by elmar 9y ago

What Is the Howey Test? - FindLaw http://consumer.findlaw.com/securities-law/what-is-the-howey-test.html http://consumer.findlaw.com/securities-law/what-is-the-howey... "The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security." Howey Test https://youtu.be/9lTS1Zofw8w https://youtu.be/9lTS1Zofw8w

motbob 9y ago
That quote is slightly misstated. It makes it sound like gold bars would be securities (since any profit from reselling gold would be "largely or wholly outside of the investor's control" since the market for gold is so large and relatively volatile). Rather than asking whether the potential profit is outside of the investor's control, the question is whether the profit is within the control of some other person or group. The example that sticks in my mind is the idea that fruit trees can be securities if they are maintained and harvested by non-investors and the fruit sale profits go to the investors.
- jdmichal 9y ago
  The fruit tree itself would not be the security. It's the thing which gives the investors the right to their share of profits which would be the security. Or, in other words, a security secures your right of ownership to something else. In a company, we typically call those things "shares". You either own the tree directly, or you hold a security which secures your right of ownership of the tree. So, if you own gold, you don't own a security. You own the actual gold, and that chunk of metal does not secure ownership of any other item. It can be exchanged, of course, for ownership of something else, but that's a function of its value as an object. Now, if you own a share of a gold ETF, that is a security that describes your rights to some chunk of metal.
delinka 9y ago
This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?
- elmar 9y ago
  I would dare to say that even Ethereum and some other alt-coins should be considered securities using this test.
  - tptacek 9y ago
    Sure, they could be.
  - anonymous5133 9y ago
    Most are. Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec.
    - shafyy 9y ago
      Do you think it's better for the economy overall if they are not regulated by the SEC?
    - vkou 9y ago
      Most countries have securities laws that are similar to those of the United States. It's arguably easier to be in compliance in a single market of 350 million people, then in multiple markets, each governed by their own laws.
    - krrrh 9y ago
      There’s an assumption being made that the SEC has a vastly different way of looking at investor protection than securities regulators in other jusrisdicions. I’m sure there will be some regulatory arbitrage going on, but if an ICO is a security it doesn’t make it automatically illegal, it just means they have to follow rules established that are mostly there to legally bind the organization to disclose information to investors and follow certain governance standards. Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.
elmar 9y ago
On the video "Howey Test" the most interesting part for me is at the end (2:55) https://youtu.be/9lTS1Zofw8w?t=175 https://youtu.be/9lTS1Zofw8w?t=175 Where if no single person or group is in charge, and decisions are taken by all, is no longer considered a security. This little detail makes the difference from security to not a security.
vanilla_nut 9y ago
The FCTC has ruled that bitcoin is actually a commodity, not a security, mostly due to the limited number of bitcoins and "proof of burn" required to acquire new bitcoins via mining. On that note... how is gold (or any other commodity, like oil or corn or wheat) not a security? Seems a little broad. I'm honestly not sure what the answer is, hopefully you (or someone else) can clarify.

by elmar 9y ago

motbob 9y ago

That quote is slightly misstated. It makes it sound like gold bars would be securities (since any profit from reselling gold would be "largely or wholly outside of the investor's control" since the market for gold is so large and relatively volatile). Rather than asking whether the potential profit is outside of the investor's control, the question is whether the profit is within the control of some other person or group. The example that sticks in my mind is the idea that fruit trees can be securities if they are maintained and harvested by non-investors and the fruit sale profits go to the investors.

jdmichal 9y ago
The fruit tree itself would not be the security. It's the thing which gives the investors the right to their share of profits which would be the security. Or, in other words, a security secures your right of ownership to something else. In a company, we typically call those things "shares". You either own the tree directly, or you hold a security which secures your right of ownership of the tree. So, if you own gold, you don't own a security. You own the actual gold, and that chunk of metal does not secure ownership of any other item. It can be exchanged, of course, for ownership of something else, but that's a function of its value as an object. Now, if you own a share of a gold ETF, that is a security that describes your rights to some chunk of metal.

delinka 9y ago

This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?

elmar 9y ago
I would dare to say that even Ethereum and some other alt-coins should be considered securities using this test.
- tptacek 9y ago
  Sure, they could be.
- anonymous5133 9y ago
  Most are. Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec.
  - shafyy 9y ago
    Do you think it's better for the economy overall if they are not regulated by the SEC?
  - vkou 9y ago
    Most countries have securities laws that are similar to those of the United States. It's arguably easier to be in compliance in a single market of 350 million people, then in multiple markets, each governed by their own laws.
  - krrrh 9y ago
    There’s an assumption being made that the SEC has a vastly different way of looking at investor protection than securities regulators in other jusrisdicions. I’m sure there will be some regulatory arbitrage going on, but if an ICO is a security it doesn’t make it automatically illegal, it just means they have to follow rules established that are mostly there to legally bind the organization to disclose information to investors and follow certain governance standards. Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.

elmar 9y ago

On the video "Howey Test" the most interesting part for me is at the end (2:55) https://youtu.be/9lTS1Zofw8w?t=175 https://youtu.be/9lTS1Zofw8w?t=175 Where if no single person or group is in charge, and decisions are taken by all, is no longer considered a security. This little detail makes the difference from security to not a security.

vanilla_nut 9y ago

The FCTC has ruled that bitcoin is actually a commodity, not a security, mostly due to the limited number of bitcoins and "proof of burn" required to acquire new bitcoins via mining. On that note... how is gold (or any other commodity, like oil or corn or wheat) not a security? Seems a little broad. I'm honestly not sure what the answer is, hopefully you (or someone else) can clarify.