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The Howey Test. How a Citrus Farmer Affected Crypto.
What does a citrus farmer in Florida from the 1940s have to do with the world of cryptocurrency today? The surprising answer lies in the Howey Test, a legal precedent that has had a significant impact on the way we define and regulate investments in the crypto world.
The Birth of the Howey Test
In 1946, a citrus grower named William John Howey found himself in front of the U.S. Supreme Court, facing accusations of selling unregistered securities. How did he end up there? Howey offered leased-back agreements, a type of investment contract, without obtaining approval from the Securities and Exchange Commission (SEC). This landmark case paved the way for the Howey Test, which serves as the foundation for identifying what constitutes an investment contract.
The Howey Test Explained
The Howey Test defines an investment contract as one that involves an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. At first glance, it might seem challenging to relate this definition to investments in stocks, oranges, or even cryptocurrencies. However, let’s break it down with a closer look at Mr. Howey’s case and its implications for the crypto market.
