Howey test

The Howey test is the legal standard used in the United States to decide whether an arrangement is an "investment contract", and therefore a security subject to securities laws. It comes from the 1946 US Supreme Court case SEC v. W.J. Howey Co., about the sale of citrus groves combined with a service contract.

Under the test, something is an investment contract if there is an investment of money in a common enterprise with an expectation of profits to be derived from the efforts of others. Applied to crypto, regulators have argued that many tokens sold in ICOs meet this definition, because buyers expected profits from a development team's work.

The test has been central to US enforcement and court cases involving crypto, including the SEC's case against Ripple over XRP, in which a court in 2023 distinguished institutional sales from sales on exchanges. Bitcoin is widely viewed as not a security. The test is US law and does not decide how tokens are treated in India.