How to figure out if an ICO token is a security - the Howey Test
How to determine if a token is a security
The Howey Test
The Supreme Court case of SEC v Howey established the test for whether an arrangement involves an investment contract. An investment contract implies that the transaction is a type of security.
In blockchain tokens, the Howey test can be expressed as three independent elements.
1. An investment of money.
2. In a joint enterprise.
3. With an expectation of profits predominantly from the efforts of others.
All three elements must be met for a token or coin to be a security. The third element encompasses both the third and fourth prongs of the traditional Howey test.
My opinion (not part of the Howey test!) is that if you intend to raise significant amounts of capital from US investors - which is what STOs are all about - then to do so in the US, you are almost certain to be selling a security. That is what the SEC has stated. What is a security token or an STO?
Another test you can apply to your intentions is this; Do you intend to pitch the token by stating or leading people to see its upside potential, wanting people to buy it because they expect the token to go up in price while they own it? If this is your plan, and the owners dont have to do work, then the token you plan is a security.
To make a utility token in the US, one approach is to set a price for it (it could also be free) and make clear in the marketing of the token that its purpose is to enable the token buyer to do work or to otherwise take actions to earn tokens - then, of course, it would not be an investment, and your marketing of the token would not present it as an investment. People would buy it for its value as a device that provides functional value.
Setting the price of your utility token and fixing it is also worth considering. This is a viable way to get tokens in the hands of people that need them and make them freely tradable. Unlike security tokens that will in most cases have restricted liquidity.
There are other legitimate solutions for providing token liquidity in the US. Email us on this - we have innovative solutions that work within the SEC regulations that we provide for companies that retain us.
Email our team on [email protected] to get help from us on how to take your Security Token Offering live on our funding platform and to get all the service providers needed to do it well.