What Is the Howey Test?
The Howey Test is a legal test used to determine whether or not an investment contract qualifies as a security. It was established in 1946 by the Supreme Court of the United States in SEC v. W.J. Howey Co., and has since been used to evaluate investments for their potential classification as securities under federal law. The test looks at four criteria: (1) Is there an investment of money? (2) Is there an expectation of profits from the investment? (3) Does any profit come from the efforts of a third party? And, (4) Are all these elements part of a common enterprise? If all four criteria are met, then it can be determined that the transaction is likely to qualify as a security and should be regulated accordingly.
The Howey Test has become one of the most important tests when determining if something constitutes an “investment contract” which would make it subject to regulation under U.S securities laws such as those found in Title 15 Section 77b(a)(1). This means that companies must comply with certain regulations when offering investments so they do not run afoul with regulators like the Securities Exchange Commission (SEC). As such, understanding how this test works is essential for anyone involved in investing or trading financial instruments within US markets.