- The SEC utilises the Howey test to determine whether a digital asset should be categorized as a security. The SEC Commissioner Hester Peirce has said that the test has constraints.
- The standard is based on a Supreme Court decision from 1946.
Although SEC Commissioner Hester Peirce has stated that the test has limitations, the Securities and Exchange Commission (SEC) utilises the so-called Howey test to determine whether a digital asset should be classified as a security.
The standard was established by a significant Supreme Court decision from 1946 that established the conditions under which a financial arrangement meets the definition of an “investment contract” and falls under the purview of federal securities legislation.
To ascertain whether an investment contract is valid, a Howey test is used. If you invest money in a joint venture with the expectation of making a profit from the efforts of others, the asset is categorised as a security.
The Securities Exchange Act of 1934 and the United States Securities Act of 1933 both impose registration requirements on assets that are deemed securities.
An asset must meet four criteria in order to be considered a security: it must be a financial investment, a joint venture, have a realistic chance of profit, and be the result of others’ labour.
Because “people buying these tokens are anticipating returns, and there’s a tiny core of entrepreneurs and technologists standing up and fostering the initiatives,” SEC chairman Gary Gensler said in August, “many tokens may be unregistered securities.”
According to Peirce’s theory, investment contracts are based on both the asset and the promises made in connection with it. She maintained that the two components could be distinguished.
Peirce claims that the Howey test does not determine whether a cryptocurrency asset is a security. Peirce contends that it is troublesome for the agency to seem to insist on the Howey sample analysis.
According to Peirce, the validity of an investment contract is dependent on both the promises made in connection with the asset as well as the asset itself. She asserted that the two elements are independent of one another.
In a nutshell, Peirce claims that the Howey test does not determine whether a crypto asset is a security. Peirce contends that it is troublesome for the agency to seem to insist on the Howey test interpretation.
You may respond, “Well, look, a lot of these early sales sure appear like securities offerings,” but is the token or cryptocurrency asset in and of itself a security? It was her. “That’s a lot harder topic to answer, and I think various individuals will respond to it,” she said.
Because of the interpretation seeing permanency, Peirce said that the agency’s dependence on the Howey test is also partly problematic.