Do you know what the “Howey Test” is? Don’t feel bad if you don’t. Probably not one person in a million does. Even so, the Howey Test determines whether and under what conditions you are permitted to use your money in investments of your own choosing.
If your contracts are deemed to be securities, the Securities and Exchange Commission (SEC) becomes your interloping policeman, governing the terms and conditions of every deal. In other words, this rule that few know anything about actually affects the lives of the multitudes.
And get this. The test emerges from a U.S. Supreme Court decision in 1946. It was about some people who made leaseback agreements with a citrus grove in Florida. Everyone was happy. But then there was the SEC, which sued to say, hey, no way, you guys can’t do this without hopping through every hoop of our own design. The Supreme Court agreed, and thus it defined a regulatable security as the following.
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
Then of course, the whole thing turns on definitions: money, expectation, common enterprise, promotion, and so on. And who gets to define what is what? You guessed it: the bureaucrats themselves. So with any innovation—even today, in the 21st century, the age of cryptoassets and globalization of digital commerce!—these people without skin in the game, luxuriating in a marble structure inside the Beltway, are in a position to decide what is what.
