The rise of the cryptocurrency era has brought about technological advancement and legal/regulatory tangle. Startups have begun making creative use of cryptocurrency as an Initial Coin Offerings to develop and distribute new crypto tokens as a substitute against fiat currency.
Because of its decentralization and deregulation nature, cryptocurrency created legal challenges for various law enforcement authorities, including, US securities law. Therefore, the most fundamental issue is whether cryptocurrencies is covered by US Securities Law.
Many schemes have been developed to raise money to avoid applying for securities law.
The courts have looked into the schemes to determine whether they are investment contracts as per the definition of federal law.
Howey Test was devised to determine if securities are subject to certain rules regarding disclosure or registration.
What is the Howey Test?
One of the most significant cases involving the investment contract definition was decided by the US Supreme Court, SEC v. W.J. Howey Co. under Howey Test stipulates the definition of an investment agreement is a that is a scheme, contract or arrangement in which individuals invest their money in a company that is common to all and are expecting to make profits solely through an effort of a third-party or promoter.
Furthermore also, the U.S., SEC has stated that cryptocurrency that meet the Howey Test are securities and are subject to regulation for securities and regulation.
Supreme Court has created the “Howey Test” to identify what transactions count as “investment contracts.”
If the transactions qualify in nature, they will be considered securities in the Securities Act of 1933 and the Securities Exchange Act of 1934.
Let’s be clear of the concept “Security” before discussing the Howey Test in more depth.
How do you define security?
The Securities Act of 1933 and the Securities Exchange Act of 1934 were enacted 100 years ago to establish an important portion of U.S government’s strategy for dealing in financial regulatory.
According to section 2(a)(1) in the Securities Act of 1933, transactions that are deemed to be “investment contracts” are referred to as securities such as books, promissory note bonds, stocks and promissory notes.
Transactions in investment have a profound influence on the way that the finance industry views and interacts with securities.
It is therefore essential to establish a consistent method to determine whether the transaction is considered investment contracts.
The securities offered have to be registered with the Securities and Exchange Commission (SEC) in the US.
A company that offers securities that aren’t exempt from registration, must register them.
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