Are You Creating a Security? The Howey Test Knows: A Look At SEC vs. Howey

Imagine going back in time to the 1930s and 40s, when a company called Howey bought acres of land, divided it into strips and sold them to tourists. Each strip of land had 48 orange trees, and Howey would then lease the land back from the new owners to farm the oranges. It all seemed like a simple transaction, but the SEC disagreed, arguing this was a security and needed to be registered or exempted. This led to the landmark case of SEC vs. Howey, which established the "Howey Test" used today to determine if something is a security. There are four elements: an investment of money, in a common enterprise, with an expectation of profit, based on the work of others. If you're working on a project, ask yourself if it meets these criteria. It could be a note, a profit-sharing agreement or an investment contract - as long as there's a passive investor expecting profit from your work, it's likely a security. Always ensure you're doing the right thing for your investors, whether it's registering the security or ensuring it falls under an exemption.