Cryptocurrencies, NFTS, and the Expanding Definition of "Investment Contract": Has the SEC Already Torpedoed the Howey Test?

Authors

David B. Guenther, University of Michigan Law School

Keywords

Commercial Transactions, Cryptocurrency & NFT Regulation, Investment Rules, Securities Regulation

Abstract

The U.S. Supreme Court in SEC v. W.J. Howey Co. in 1946 famously defined the term “investment contract”—the catch-all term in the definition of “security” in the Securities Act of 1933—to mean (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits solely from the efforts of others. While the Howey test has endured as the standard definition of an investment contract, the Howey Court did not define the term “common enterprise,” and for more than fifty years, Howey’s common enterprise prong has eroded. Since 2017, the Securities and Exchange Commission has further eroded the Howey test. In the course of a broad enforcement initiative against issuers of cryptocurrencies and non-fungible tokens, the SEC has systematically ignored Howey’s common enterprise prong and declared that a common enterprise is not a distinct element of an investment contract. In a series of related cases, the Southern District of New York has largely accepted the SEC’s position. By 2024, the SEC and the Southern District appeared ready to find an “investment contract” wherever there was (1) an investment of money and (2) investor profits depended on the promoter’s efforts. Howey’s common enterprise prong has been eliminated, and the decisive inquiry has become only Howey’s “profits from the efforts of others” prong. The Howey test—in part due to its own internal weaknesses—has collapsed back into its blue sky precedents. Has the SEC already torpedoed the Howey test? This Essay concludes that the answer is yes. Commentators and dissenting SEC commissioners have questioned whether the SEC has expanded Howey to apply to a range of commercial transactions beyond the reasonable scope of the federal securities laws. Public policy limits are needed on any investment contract test.

Recommended Citation

Cryptocurrencies: 30 Fordham J. Corp. & Fin. L. 385 (2025).