The Supreme Court’s 1946 decision in SEC v. W.J. Howey Co. established a four-prong test that the SEC applied to 125 cryptocurrency-related enforcement actions between 2021 and 2024 alone, generating $6.05 billion in penalties according to Cornerstone Research. Chairman Gary Gensler stated publicly that “the vast majority” of crypto tokens qualify as securities under this framework. His successor, Chair Paul Atkins — sworn in April 21, 2025 — has taken a fundamentally different position, stating in March 2026 that “most crypto assets should not be considered securities outright” as part of the SEC-CFTC joint token taxonomy guidance.
The Four Prongs of Howey
The Howey test asks whether a transaction involves (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) derived from the efforts of others. Each prong has generated substantial litigation in the digital asset context, with federal courts reaching divergent conclusions on identical token structures.
Investment of Money
The first prong presents the fewest analytical challenges in the digital asset context. Federal courts have consistently held that the exchange of fiat currency, Bitcoin, Ethereum, or other digital assets for a newly issued token satisfies the “investment of money” requirement. In SEC v. Shavers (2013), the Eastern District of Texas held that Bitcoin itself constitutes “money” for purposes of the Howey analysis, establishing early precedent that cryptocurrency-for-token exchanges meet this threshold.
The SEC’s position, articulated in the 2019 Framework for “Investment Contract” Analysis of Digital Assets, extends this prong to include airdrops and bounty programs where tokens are distributed in exchange for services such as social media promotion. The Commission argues that any exchange of value — whether fiat, crypto, or labor — satisfies the investment prong.
Common Enterprise
Federal circuits remain split on the common enterprise requirement. The SEC typically argues for “horizontal commonality,” where investors’ funds are pooled and their fortunes rise or fall together. In token offerings, this is straightforward: purchasers contribute funds to a common pool, and the token’s value fluctuates based on market conditions affecting all holders equally.
Several circuits also recognize “vertical commonality,” tying the investor’s fortunes to those of the promoter. This theory has particular relevance for tokens issued by development teams that retain significant holdings. When a founding team holds 20-40% of total supply — common in token generation events — the alignment between promoter and investor interests supports a finding of vertical commonality.
The Ninth Circuit’s broad vertical commonality test requires only that the promoter’s efforts affect investors’ fortunes, regardless of whether the promoter’s own financial interests are aligned. This expansive interpretation captures virtually every token where a development team continues post-launch work, as their technical contributions directly impact token utility and value.
Reasonable Expectation of Profits
This prong generates the most contested litigation in digital asset cases. The SEC examines whether purchasers reasonably expected to profit from their investment, looking at marketing materials, exchange listings, secondary market trading, and the economic reality of the token’s use case.
The Commission’s 2019 Framework identified specific factors indicating profit expectation: the token is offered broadly to potential purchasers rather than targeted at expected users; the token’s transferability is emphasized; the token is offered at a discount to projected future value; or marketing materials highlight the potential for capital appreciation.
In SEC v. Ripple Labs (2023), Judge Torres drew a critical distinction between institutional purchasers — who clearly expected profits from XRP appreciation — and programmatic purchasers on exchanges — who may not have known they were buying from Ripple at all. This bifurcated analysis sent shockwaves through the industry, suggesting that the same token could be a security in one transaction context and not in another.
The “essential ingredients” test from Howey requires that profit expectations be reasonable, not merely speculative. Tokens with genuine utility — functioning as access keys, governance rights, or medium of exchange within an operational network — present stronger arguments against this prong, though the SEC has argued that utility and investment characteristics can coexist.
Efforts of Others
The fourth prong asks whether expected profits derive “solely” from the efforts of others. Federal courts have broadly interpreted “solely” to mean “predominantly” or “significantly,” following the Ninth Circuit’s modification in SEC v. Glenn W. Turner Enterprises (1973).
For digital assets, the SEC analyzes whether a centralized team, promoter, or sponsor performs essential managerial efforts that affect the success of the enterprise. Factors include: the development team’s ongoing technical work; marketing and business development efforts; decisions about network governance, token burns, or supply management; and the degree to which the network has achieved “sufficient decentralization.”
The concept of “sufficient decentralization” originated with SEC Director William Hinman’s 2018 speech, where he suggested that a network could evolve from an investment contract to a non-security as it becomes sufficiently decentralized. While the SEC has never formally adopted this position — and subsequent leadership has distanced from it — the concept has influenced court analysis in multiple cases including Ripple and LBRY.
SEC Staff Guidance on Digital Asset Securities
Beyond enforcement actions, the SEC has issued several guidance documents that shape the Howey test application to tokens.
Framework for “Investment Contract” Analysis (2019)
The Division of Corporation Finance and the Office of the Chief Accountant jointly published this non-binding framework in April 2019. It identifies over 30 specific factors — organized under the Howey prongs — that the staff considers when evaluating whether a digital asset is offered as an investment contract.
Key factors include whether the digital asset is marketed with emphasis on potential for profit, whether there is a secondary trading market, whether the digital asset is offered broadly rather than to expected users, and whether the development team retains a significant portion of tokens.
The framework also introduced the concept of evaluating tokens at different points in their lifecycle. A token offered during an ICO may constitute a security, but the same token, once the network is operational and decentralized, might not. This temporal analysis has proven influential in subsequent enforcement actions and no-action letter requests.
No-Action Letters
The SEC has issued a limited number of no-action letters for digital asset projects. TurnKey Jet (2019) received a no-action letter for a token that functioned as a prepaid voucher for charter jet services, with key restrictions: the token could not be transferred, had a fixed price, and was marketed purely for consumptive use.
Pocketful of Quarters (2019) obtained relief for an in-game token that could be transferred between users but was designed for consumptive use within gaming platforms. These letters established narrow parameters for tokens that might avoid securities classification.
Under the Gensler administration, the scarcity of no-action letters reflected the SEC’s enforcement-first approach. However, the Crypto Task Force has reopened the pipeline since January 2025. The landmark December 2025 DTC tokenization no-action letter — permitting the world’s largest securities depository to operate tokenization services on permissionless blockchains — represents a qualitative leap from narrow earlier letters. Additional 2025 guidance addressed stablecoin classification, broker-dealer custody of tokenized assets, and meme coin treatment. For a complete catalog, see our no-action letters analysis.
Circuit Court Divergence
Federal courts have reached inconsistent conclusions applying Howey to digital assets, creating regulatory uncertainty that persists across jurisdictions.
The Southern District of New York, which handles the highest volume of SEC crypto cases, has produced divergent results even within the same courthouse. Judge Rakoff in SEC v. Terraform Labs rejected the Ripple court’s distinction between institutional and programmatic sales, holding that the “manner of sale” is irrelevant to the Howey analysis. Meanwhile, Judge Torres maintained her bifurcated framework on appeal.
The Second Circuit has yet to rule definitively on digital asset securities classification, though multiple cases are in the appellate pipeline. The circuit’s existing precedent on investment contracts — particularly its emphasis on economic reality over form — suggests it may adopt a transaction-specific approach.
Other circuits present different analytical frameworks. The Eleventh Circuit’s narrow definition of “common enterprise” could limit the SEC’s ability to pursue certain token cases, while the Fifth Circuit’s broad interpretation of “efforts of others” may expand it.
Implications for Token Issuers
Token issuers face a binary classification problem with no safe harbor. Under current SEC interpretation, a token that satisfies all four Howey prongs must either be registered under Section 5 of the Securities Act or qualify for an exemption — typically Regulation D, Regulation S, or Regulation A+.
The absence of a formal digital asset safe harbor means that issuers must conduct fact-intensive legal analysis before any token distribution. The cost of this analysis — typically $200,000-$500,000 for a comprehensive securities law opinion — creates a significant barrier to entry that favors well-funded projects over innovative startups.
Projects seeking to avoid securities classification must demonstrate genuine utility at launch, limit marketing to consumptive use cases, restrict transferability where possible, and avoid any suggestion of profit potential. Even these precautions provide no guarantee, as the SEC has brought enforcement actions against tokens with arguable utility characteristics.
For a comparison of how different regulatory approaches handle token classification, see our analysis of SEC vs. CFTC jurisdiction. For platform-specific compliance requirements, review our broker-dealer and ATS guides.
Looking Ahead
The Howey test, designed for orange grove investment contracts in 1946, continues to serve as the primary analytical framework for 21st-century digital assets — but its dominance is waning. In November 2025, Chair Atkins unveiled “Project Crypto,” which includes a token taxonomy anchored in Howey analysis but designed to provide clearer categorical guidance. In March 2026, the SEC and CFTC jointly issued interpretive guidance establishing a formal token taxonomy. The enacted GENIUS Act established a federal framework for payment stablecoins, and the FIT21 Act would supplement or replace Howey with statutory definitions for digital assets. Meanwhile, the Crypto Task Force roundtable on tokenization (May 12, 2025, “Tokenization — Moving Assets Onchain: Where TradFi and DeFi Meet”) specifically addressed how the Howey framework applies to tokenized real-world assets.
Howey Applied to Specific Token Structures
The application of the Howey test varies meaningfully across different token structures commonly used in the security token market:
Equity tokens. Tokens representing direct ownership in a legal entity satisfy all four prongs unambiguously. The investment of money, common enterprise (horizontal commonality through the entity), profit expectation (dividends and appreciation), and efforts of others (management team) are all present by design. These tokens should be issued under Reg D, Reg A+, or Section 5 registration.
Real estate tokens. Tokenized real estate interests typically satisfy Howey whether structured as LLC membership interests, REIT shares, or tenancy-in-common interests. The property manager’s or sponsor’s efforts in managing the underlying real estate satisfy the “efforts of others” prong.
Fund tokens. Tokenized fund interests — including BlackRock’s BUIDL (the largest tokenized treasury fund at $1.87 billion AUM with 45% market share, tokenized by Securitize) and similar products — are securities by structure. The fund manager’s investment decisions constitute the essential “efforts of others,” and investors’ profit expectations are the fund’s primary purpose. The RWA tokenization market has grown to $19.4 billion on-chain as of early 2026, with tokenized treasuries alone reaching $7.4 billion by mid-2025 according to RWA.xyz.
DeFi yield tokens. Tokens that generate yield through automated market making, lending, or staking present contested Howey analysis. The SEC has argued that protocol developers’ efforts in designing and maintaining yield-generating mechanisms satisfy the “efforts of others” prong, even when the mechanisms operate through automated smart contracts. Courts have not uniformly agreed.
The Howey Test and International Regulation
The Howey test is a uniquely American analytical framework. Other jurisdictions use different approaches to determine whether a token constitutes a regulated financial instrument:
The EU’s MiCA regulation uses a categorical approach — classifying tokens as asset-referenced tokens, e-money tokens, or other crypto-assets — rather than applying a factor-based test. For a detailed comparison, see our analysis of US vs. EU tokenized securities regulation.
Switzerland’s functional classification distinguishes between payment tokens, utility tokens, and asset tokens based on economic function rather than investment contract analysis.
These divergent approaches create compliance challenges for issuers conducting cross-border offerings under Regulation S, as a token classified as a security under Howey may face different classification in other jurisdictions.
For the Crypto Task Force’s approach to updating the Howey framework, see our analysis. For FINRA rules governing broker-dealers who must evaluate Howey classification before facilitating transactions, see our regulatory guide. For the SEC’s official investment contract analysis guidance, see SEC Framework for Investment Contract Analysis.
Until legislative action occurs, the Howey test remains the governing framework, applied case-by-case through enforcement actions, court decisions, and the occasional staff guidance. Market participants must continue to operate within this framework while monitoring the evolving judicial and legislative landscape through platforms like SEC Tokenization and our network partners at Tokenization Policy.