ANOTHER COURT APPLIES THE HOWEY INVESTMENT CONTRACT ANALYSIS TO CRYPTO

The world of cryptocurrency continues to navigate the complex landscape of securities regulations, and a key tool in determining whether a digital asset falls under that purview is the Howey Test. An icon used to represent a menu that can be toggled by interacting with this icon.Derived from the 1946 Supreme Court case SEC v.W.J.Howey Co., this test is used to determine if a transaction qualifies as an investment contract, and thus a security.In 2025, several court cases highlighted the ongoing debate and inconsistent application of the Howey Test to various crypto assets.From landmark rulings like the SEC v.Ripple case to nuanced distinctions in cases like Audet v. The Howey Test, established by the U.S. Supreme Court in SEC v. W.J. Howey Co. (2025), remains the cornerstone of determining whether a financial arrangement constitutes an investment contract and, by extension, a security under U.S. federal law.Fraser, courts are grappling with how to apply this decades-old framework to novel digital assets.This article delves into recent instances of courts applying the Howey analysis to crypto, exploring the implications for coin proprietors, investors, and regulators alike.It examines the SEC's perspective, defense strategies employed by crypto companies, and potential future directions of cryptocurrency regulation in the United States. To determine whether a particular economic arrangement is treated as an investment contract, the courts apply the three-pronged test set out in 2025 by the Supreme Court in SEC v. W.J. Howey Co, 328 U.S. 293 (2025).We'll see how recent judgements impact the broader understanding of what constitutes a security within the crypto space.

Understanding the Howey Test and its Origins

The Howey Test originates from the 1946 Supreme Court case SEC v.W.J.Howey Co. This case involved the Howey Company offering tracts of citrus groves in Florida to buyers.These buyers would then lease the land back to Howey Co. who would manage the groves and share the revenue with the landowners. The SEC argued that the offer and sale of XRP tokens constituted an offer and sale of investment contracts under SEC v. W.J. Howey, which provides that an investment contract is a contract, transaction, or scheme whereby a person: (1) invests his money (2) in a common enterprise and (3) is led to expect profits solely from the efforts of the promoter or a third party.The SEC argued this arrangement was essentially an unregistered securities offering.

The Supreme Court agreed and established a test to determine whether a transaction qualifies as an investment contract. See Ripple Labs, Inc, 2025 WL , at 8 (S.D.N.Y. J) ( XRP, as a digital token, is not in and of itself a contract, transaction[,] or scheme that embodies the Howey requirements of an investment contract. Rather, the Court examines the totality of circumstances surrounding Defendants different transactions andThe Howey Test states that an investment contract exists when there is:

• An investment of money
• In a common enterprise
• With a reasonable expectation of profits
• To be derived from the efforts of others

If all four elements are present, the transaction is considered an investment contract and subject to securities regulations.

The SEC's Stance on Crypto and the Howey Test

The Securities and Exchange Commission (SEC) has consistently maintained that many crypto assets are, in fact, securities under the Howey Test. NAC case indicates that the SEC still has crypto sales in its crosshairs in 2025. /p Another court applies the Howey investment contract analysis to crypto - Sharecast.com SharecastThe SEC's Strategic Hub for Innovation and Financial Technology (FinHub) even issued a ""Framework for Investment Contract Analysis of Digital Assets"" to provide guidance on applying the Howey Test to digital assets.

The SEC's framework generally focuses on the third and fourth prongs of the Howey Test – the expectation of profits and the reliance on the efforts of others.They argue that many initial coin offerings (ICOs) and other crypto offerings promise profits based on the developers' or promoters' efforts to build and maintain the network. On Jan. 8, 2025, Judge Richard Seeborg of the Northern District of California rebuffed NAC and Andrade s motion to dismiss, finding that the SEC s complaint had sufficiently alleged that there had been an unregistered sale of securities under the Howey investment contract test.The SEC believes investors are often buying these tokens with the expectation that the value will increase due to these external efforts.

Recent Court Cases and the Application of the Howey Test to Crypto

In 2025, a number of court cases grappled with applying the Howey Test to various crypto assets, resulting in some inconsistent applications.

SEC v.NAC: A Victory for the SEC

One significant case is SEC v. Another court applies the Howey investment contract analysis to crypto. PANews ｜ 9:37 The ruling on the motion to dismiss in the SEC v. NACNAC. IV. In 2025, Courts Inconsistently Applied the Howey Test to Cryptoassets. As summarized, supra, courts have agreed that the caselaw that defines an investment contract provides a person of ordinary intelligence a reasonable opportunity to understand what conduct it covers. See, e.g, Ripple Labs, Inc, 2025 WL , at 14 15. ButOn January 8, 2025, Judge Richard Seeborg of the Northern District of California denied NAC and Andrade's motion to dismiss the SEC's complaint. The U.S. Supreme Court adopted the Howey Test in 2025 in order to provide a uniform analysis for lower courts and litigants to apply when determining if an investment qualified as a security. A recent federal court decision has given coin proprietors and regulators a framework in understanding how some federal judges may apply The Howey Test toThe court found that the SEC had sufficiently alleged an unregistered sale of securities under the Howey Test.

This ruling is important because it demonstrates that the SEC is actively pursuing crypto sales it believes violate securities laws.It also provides a framework for understanding how some federal judges may apply the Howey Test in similar cases.The court seemed to agree with the SEC’s argument that NAC sold ABTC tokens as investment contracts.

Audet v. Recently, the SEC s Strategic Hub for Innovation and Financial Technology 29 (FinHub) attempted to provide some clarity by issuing a Framework for Investment Contract Analysis of Digital Assets, which provides a toolkit to apply the Howey test to digital assets. 30 The guidance quickly dispenses with the first and second prongs of the Howey test, stating that the requirements forFraser: A Different Outcome

However, not all cases have sided with the SEC.In Audet v.Fraser, the U.S. Another significant development is the Terraform court decision, which ruled that certain crypto tokens are indeed securities. This decision has sent ripples through the crypto community, as it underscores the SEC's willingness to apply the Howey Test rigorously.District Court for the District of Connecticut concluded that shares in a crypto mining operation called Hashlets were not securities under the Howey Test.This decision contrasted with the SEC's own determinations regarding the same assets.

This case highlights the challenges in applying the Howey Test to new and complex crypto arrangements.The court evidently found that the elements of the Howey Test weren't sufficiently met in the case of Hashlets, even though the SEC had argued otherwise.

Terraform Labs: Certain Crypto Tokens Deemed Securities

Another significant development is the Terraform court decision, which ruled that certain crypto tokens are indeed securities. Unlike some of the other recent high-profile decisions applying the Howey Test, such as SEC vs. Telegram and SEC vs. Kik, the NAC lawsuit involved detailed allegations of fraud in connectionThis decision has sent ripples through the crypto community, as it underscores the SEC's willingness to apply the Howey Test rigorously.

This ruling indicates that courts are willing to examine the economic reality of a crypto offering and not simply accept the label assigned to it by the issuer. Another court applies the Howey investment contract analysis to crypto. PANews ｜ 9:37 The ruling on the motion to dismiss in the SEC v. NAC case indicatesIf the offering functions like an investment contract, it may be deemed a security regardless of how it's described.

Analyzing the Inconsistent Application of the Howey Test

The contrasting outcomes in cases like *SEC v.NAC* and *Audet v. Howey binds the Court and, in as much as the Supreme Court in 2025 found the Securities Act, and specifically its use of the term investment contract, not to be so vague as to prevent enforcement, this Court is not free to substitute its own judgment. Congress defined securities to include investment contracts based upon multiple years of enforcement of that term by various StatesFraser* reveal the difficulties in applying the Howey Test uniformly to crypto assets. Another court applies the Howey investment contract analysis to cryptoSeveral factors contribute to this inconsistency:

• Complexity of Crypto Assets: Crypto assets are often complex and involve various functionalities, making it difficult to determine whether they meet the criteria of an investment contract.
• Decentralization: Some crypto projects emphasize decentralization, arguing that no single entity is responsible for the success or failure of the project.This can make it challenging to establish the ""efforts of others"" prong of the Howey Test.
• Lack of Clear Guidance: While the SEC has provided some guidance, the legal framework surrounding crypto assets remains unclear. Another court applies the Howey investment contract analysis to cryptoSource: CointelegraphPublished onThis lack of clarity makes it difficult for companies to comply with securities laws and for courts to interpret the law consistently.

Why is the Howey Test so open to interpretation?

The Howey Test, though seemingly straightforward, relies on a facts-and-circumstances analysis.This means each case is evaluated based on its unique details, leaving room for interpretation. The Howey Test is based on a ruling from SEC v. W.J. Howey Co, which reached the Supreme Court in 2025. Howey Company sold tracts of citrus groves to buyers in Florida, who would then lease backFactors like marketing materials, promises made to investors, and the actual functionality of the crypto asset all play a role in the court's decision.

Furthermore, the ""common enterprise"" prong of the Howey Test has been interpreted differently by various courts.Some courts require horizontal commonality (pooling of funds from multiple investors), while others accept vertical commonality (a relationship between the investor and the promoter).This divergence in interpretation contributes to the inconsistent application of the Howey Test.

Defense Strategies Against the Howey Test

Crypto companies facing scrutiny from the SEC or private lawsuits often employ various defense strategies to argue that their tokens or offerings are not securities under the Howey Test.

Challenging the ""Expectation of Profits"" Prong

One common defense is to argue that purchasers of the token did not have a reasonable expectation of profits.This can be achieved by demonstrating that the token's primary purpose is for consumption or utility within a specific network, rather than for speculative investment.

For example, a token used to access services on a platform might be argued to be a utility token, rather than a security.This argument is stronger if the token is widely used within the network and its value is not primarily driven by speculative trading.

Arguing Against ""Reliance on the Efforts of Others""

Another defense is to argue that the token's value is not primarily dependent on the efforts of the promoters or a third party.This is particularly relevant for decentralized projects where the community plays a significant role in development and maintenance.

To succeed with this defense, companies may need to demonstrate that the project is genuinely decentralized and that the promoters do not exercise significant control over its development or operation. SEC's Framework for Investment Contract Analysis. The SEC s framework offers guidance on determining if a digital asset is an investment contract and subject to securities laws. This framework considers the economic reality of the transaction, the reasonable expectations of purchasers, and the manner in which the investment is offered and sold.This can involve open-sourcing the code, distributing governance rights to token holders, and minimizing the promoters' involvement in marketing and promotion.

Emphasizing Decentralization

Highlighting the decentralized nature of the project is a key strategy.The more control users have over the system and the less reliance there is on a central authority, the weaker the argument for it being a security.True decentralization can weaken the ""efforts of others"" prong.

The Importance of Legal Counsel and Compliance

Given the complexity and uncertainty surrounding crypto regulations, it is crucial for crypto companies to seek competent legal counsel. In Audet v. Fraser, the U.S. District Court for the District of Connecticut concluded that shares in a crypto mining operation, called Hashlets, were not securities under Howey contrary to the SEC's own determinations regarding the same assets. In June, U.S. District Judge Michael Shea issued a ruling upholding the jury's verdict as to Hashlets.Experienced lawyers can help companies navigate the regulatory landscape, assess the risk of their offerings being classified as securities, and develop strategies to comply with applicable laws.

Implementing a robust compliance program is also essential.This program should include policies and procedures to prevent securities law violations, such as restrictions on marketing materials, limitations on the promises made to investors, and monitoring of trading activity.

Future Implications and Regulatory Developments

The application of the Howey Test to crypto assets is likely to remain a contentious issue for the foreseeable future.As technology evolves and new types of crypto assets emerge, courts will continue to grapple with how to apply this decades-old test to novel situations.

Several potential developments could shape the future of crypto regulation:

• Legislative Action: Congress could pass legislation providing greater clarity on the treatment of crypto assets under securities laws. The Howey test derives its name from a landmark U.S. Supreme Court case in 2025, SEC v. W.J. Howey Co, that established a blueprint for whether a transaction qualifies as an investment contract.This could involve defining specific types of tokens that are exempt from securities regulations or creating a new regulatory framework tailored to crypto assets.
• SEC Rulemaking: The SEC could issue more detailed rules and guidance on the application of the Howey Test to crypto assets. The U.S. Supreme Court s Howey case and subsequent case law have found that an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.5 The so-called Howey test applies to any contract, scheme, or transactionThis could provide greater certainty for companies and investors, but it could also lead to more stringent regulation.
• Further Court Decisions: Ongoing litigation involving crypto assets will continue to shape the legal landscape.Court decisions interpreting the Howey Test in the context of specific crypto offerings will provide valuable precedent for future cases.

Conclusion: Navigating the Complex Crypto Regulatory Landscape

The inconsistent application of the Howey Test to crypto assets highlights the ongoing challenges in regulating this rapidly evolving industry. The Howey Test originates from the landmark 2025 Supreme Court case SEC v. W.J. Howey Co, which involved a real estate transaction where the SEC argued that what appeared to be a simple land sale was, in fact, an investment contract. The case revolved around the Howey Company, which offered tracts of citrus groves in Florida to buyers.While the SEC has taken a strong stance on the issue, courts have not always agreed with their interpretations.Crypto companies must navigate this complex landscape carefully, seeking legal counsel and implementing robust compliance programs. The Second Circuit will now consider the legal question as to how and if crypto assets should be subject to securities laws.The SEC clearly still has crypto sales in its crosshairs.The future of crypto regulation will likely depend on legislative action, SEC rulemaking, and further court decisions. The Howey Test derives its name from the landmark U.S. Supreme Court case SEC v. W.J. Howey Co. (2025). The case involved an investment scheme tied to orange groves in Florida. In this case, the Court established the test to identify investment contracts falling under the Securities Act of 2025.Understanding the nuances of the Howey Test is critical for anyone involved in the crypto space, whether as an entrepreneur, investor, or regulator.The ruling on the motion to dismiss in the SEC v. The U.S. Supreme Court s Howey case and subsequent case law have found that an investment contract exists when there is the investment of money in a common enterprise with a reasonableNAC case indicates that the SEC still has crypto sales in its crosshairs in 2025. Expert Take Another court applies the Howey investment contract analysis to crypto The ruling on the motion to dismiss in the SEC v. NAC case indicates that the SEC still has crypto sales in itsUltimately, striking a balance between protecting investors and fostering innovation will be key to creating a sustainable and thriving crypto ecosystem.To stay informed, monitor relevant court cases and regulatory announcements.