The Howey Test (Howey Test) is a legal instrument developed by American case law to determine whether a financial instrument belongs to the category of investment contracts. As applied to the crypto industry, the test is used to understand whether a particular token can be considered a security. If the answer is positive, its issuance and circulation fall under the regulation of the Securities and Exchange Commission (SEC), and the offering organizers are obliged to comply with the corresponding disclosure and registration requirements.

The four criteria of the test

• an investment of money;
• investment in a common enterprise;
• the presence of an expectation of profit;
• profit is generated primarily through the efforts of third parties rather than the investor.

If an asset meets all four criteria simultaneously, it will most likely be deemed a security. For projects, this means increased legal liability to investors and the need to comply with strict rules. That is why, when structuring a token issuance, teams often strive to build the asset's economics so that it serves primarily a utility function and does not fall under the definition of an investment contract.