Howey Test Has Limits as per SEC Commissioner Hester Peirce

• SEC Commissioner Hester Peirce has said that the test has limits.
• The standard is based on a 1946 Supreme Court ruling.

The Securities and Exchange Commission (SEC) uses the so-called Howey test to decide whether a digital asset should be classed as a security, although SEC Commissioner Hester Peirce has said that the test has limits.

The standard is based on a 1946 Supreme Court ruling that established the conditions under which a financial arrangement is considered an “investment contract” and hence subject to federal securities legislation. Peirce elaborated on the importance of the test for the crypto sector.

Unregistered Securities or Not?

The Howey test was established in a case that included the selling of units in a Florida citrus grove development where investors may split the earnings from the grove’s production.

To be an “investment contract,” the panel defines “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

According to Gary Gensler, head of the Securities and Exchange Commission (SEC), “many tokens may be unregistered securities” since “folks buying these tokens are anticipating profits, and there’s a small group of entrepreneurs and technologists standing up and nurturing the projects.”

Investment contracts, according to Peirce’s analysis, are founded not only on the asset but also on the promises made in connection with it. She argued that the two parts may be considered distinct.

According to Peirce, the Howey test doesn’t resolve the question of whether or not a crypto asset is a security. Peirce argues that the agency’s apparent insistence on the Howey test interpretation is problematic.