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Howey test Meaning

A legal framework established by the U.S. Supreme Court to determine if a transaction qualifies as an "investment contract." A transaction is considered an investment contract if it involves an investment of money in a common enterprise with a reasonable expectation of profits to be derived primarily from the efforts of others.

This test is the primary tool used by regulators to decide whether a token or digital asset should be classified as a security. If an asset passes the Howey Test, it must comply with federal securities laws, including strict registration and disclosure requirements.

The application of this 1946-era test to decentralized assets remains a point of intense debate.

Proponents of the industry argue that truly decentralized networks do not rely on a "central group," making the "efforts of others" prong difficult to satisfy, whereas regulators often use it to maintain oversight of capital raises.

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