Substance Over Form
Although the Howey Test uses
the term „money,” later cases
have expanded this to inclu-
de investments of assets other
than money.
The term „common enterpri-
se” isn’t precisely defined, and
courts have used different in-
terpretations. Most federal co-
urts define a common enter-
prise as one that is horizontal,
meaning that investors pool
their money or assets together
to invest in a project.
However, other courts use dif-
ferent definitions. The final
factor of the Howey Test con-
cerns whether any profit that
comes from the investment is
largely or wholly outside of the
investor’s control.
If so, then the investment mi-
ght be a security.
If, however, the investor’s own
actions largely dictate whether
an investment will be profita-
ble, then that investment is
probably not a security.
In deciding Howey, the Supreme Court created
a test that looks at an investment’s substance,
rather than its form, as the determining factor
for whether it is a security. Even if an invest-
ment is not labeled a „stock” or „bond,” it may
very well be a security under the law, meaning
that registration and disclosure requirements
apply.
After the creation of the Howey Test, some pro-
moters masqueraded securities to try and esca-
pe registration requirements, such as by calling
an offer of securities an interest in a general
partnership.
To deal with these charades, courts look at the
economic realities behind an investment sche-
me, rather than at its name or form, to deter-
mine whether it is a security. If an investment
opportunity is open to many people, and if in-
vestors have little to no control or management
of investment money or assets, then that inve-
stment is probably a security.
If, on the other hand, an investment is made
available only to a few close friends or associa-
tes, and if these investors have significant in-
fluence over how the investment is managed,
then it is probably not a security.
Above is an excerpt from an article published
by: FindLaw .
You must all have seen these articles in CoinTe-
legraph, Coinbase and the likes about the SEC’s
push to regulate ICOs and classify all of them
as security tokens.
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