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 the context of blockchain tokens, the Howey test can be expressed as three independent elements.
1. An investment of money.
2. In a common enterprise.
3. With an expectation of profits predominantly from the efforts of others.
All three elements must be met in order 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 advice (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. There are rare exceptions to this, which we advise client companies on. What is a security token or an STO?
To make a utility token in the US one strong approach is to set a low price for it (it could be free, or say $1,) - then, of course, it would not be attractive as an investment, they would buy it for its value as a device that provides functional value which tokens are usually designed to do. Setting the price and fixing it is also worth considering. This is a viable way to get tokens in the hands of people that need them while investors are locked into their security tokens and unable to sell them.
There are other legitimate solutions for providing token liquidity in the US while the security token purchasers are locked and unable to sell their security tokens. Email us on this - we have three innovative solutions that work within the SEC regulations that we provide for companies that retain us.
Email our team on Support@ManhattanStreetCapital.com to get advice 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.