The Howey test derives from the application of several findings by the U.S. Supreme Court regarding a case involving a land investment scheme (an orange orchard) in Florida in 1946. In U.S. Securities and Exchange Commission ("SEC") versus W.J. Howey Co. the court found that the Howey Company had violated the U.S. Securities Act of 1933 by not registering as securities the investment contracts that it was offering to members of the public. In his opinion for the majority Judge Frank Murphy, among other things, formulated the test, writing, "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others."
The SEC and the DAO
The DAO was a venture capital fund established in 2016 in Germany to make investments in entities designing technologies exploiting smart contract technologies on the Ethereum platform. About $50 million in Ether tokens were stolen. On July 17, 2017, the U.S. Securities and Exchange Commission published an investigative report because participation in the DAO's schemes had been offered and sold to U.S. residents. The report provides a thorough description of the establishment and organization of the DAO and notes that by doing business with U.S. residents the DAO likely violated the federal securities laws in a number of ways including that the DAO tokens would have been securities under the Howey test and that they should have been registered and offered pursuant to the Commission's regulations. In addition, the Commission indicated that platforms where the DAO tokens were traded probably should have been registered as securities exchanges or other regulated facilities unless there were relevant exemptions available.
- Passing the Howey Test: How to Regulate Blockchain Tokens. Medium.
- SECURITIES AND EXCHANGE COMMISSION v. W. J. HOWEY CO. et al.. Legal Information Institute of Cornell Law School.
- Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO. Securities and Exchange Commission.