Do fungible gaming tokens constitute a security or an investment contract? A detailed analysis and framework

gaming token

The following sample securities opinion letter and legal analysis is written for a fictional video game called “Cubed Squares Studios,” and was drafted for educational and demonstration purposes. This is intended to illustrate some of the strengths related to most fungible gaming tokens with inherent functionality, not representing securities or investment contracts pursuant to the Securities Acts of 1933 and 1934. The specific facts and circumstances as it relates to your gaming projects and how relevant securities laws apply, need to be evaluated by an attorney. However, this analysis goes over some of the fundamental principles with respect to gaming law, securities law, and as to why fungible gaming tokens are not securities.


RE: Legal Opinion Regarding Cube Tactics

Our firm has completed the research to determine the likelihood of the Cubed Three Parent, Inc.’s project (the “Project”) and its components falling under the classification of a “security” in the United States of America. The Project consists of (i) the “Cubed” decentralized application/game (the “Game”); (ii) the Game’s underlying blockchain technology and protocol (the “Protocol”); and (iii) the Game’s distribution of unique non-fungible tokens[1] (“NFTs”), including its native utility token (the “Token” or “Tokens”).


Recital of Facts

    1. Cubed Three Parent, Inc., a Delaware corporation, (the “Company”) is the entity that initially developed the free-to-play role-playing game.
    2. The Protocol will utilize self-executing smart contracts on the Ethereum and Polygon networks/blockchains (decentralized and distributed computing platforms).[2] The Protocol governs or establishes the manner in which its players (“Players”) access the Project’s Game and the Game’s marketplace (the “Marketplace”) and provides the mechanisms in which Players can utilize the native tokens or other in-game assets and receive rewards within the ecosystem of the game.
    3. The Game’s NFTs consist of one thousand (1,000) one-of-a-kind genesis NFT characters (referred to as “Cubies”). Cubies fall within ten classes, five races, and twenty (20) companion types and have a variety of physical attributes, weapons, ancillary items, and visual/cosmetic elements.
    4. Players may utilize their Cubies “in-game” during “exploration mode” to play against game non-playing-characters (“NPCs”) and earn different rewards. Various characteristics of the NFTs will help determine whether a Player receives rewards when “battling” other Players. Like traditional role-playing games, the Game allows players to “level-up” their Cubies and progress through different stages of improvement for their characters. Through game play, Cubies can progress to higher levels, which increases their abilities within the Game and ultimately helps Players compete (either with NPCs or other players) in earning rewards within the game.
    5. Rewards will consist of the Game’s own native utility ERC-20 token (individually referred to herein as a “CUBE” and collectively referred to herein as “CUBEs”) on the Ethereum and Polygon networks/blockchains. Players may utilize the Marketplace to buy, trade, or loan CUBEs or other in-game assets to fellow Players participating in the Game and its ecosystem.
    6. A total of 200,000,000 CUBEs will be released over a five-year period according to a set schedule. Fifty percent (40%) of the CUBEs’ allocation will be reserved for in-game rewards when completing quests in Exploration mode and for ascending tiers in the Player-versus-Player arenas.

Legal Analysis

 Securities Acts

 The Securities Act of 1933 (the “1933 Act”),[3] as amended, makes it illegal to offer or sell securities in the United States, unless the offer or sale is: (i) made pursuant to an effective registration statement[4] filed by the issuer with the Securities and Exchange Commission (the “SEC”); or (ii) is exempt under federal securities law. Notwithstanding the foregoing, the operative question is whether the CUBEs or Cubies distributed and governed by the Players’ and Game’s Protocol are classified as “securities” and must be registered pursuant to the 1933 Act and the Securities Exchange Act of 1934, as amended (the “1934 Act”)[5] (with the 1933 Act and 1934 Act collectively referred to herein as the “Securities Acts”).

Regulatory Ambiguity Surrounding Existing Legal Framework

 The Supreme Court of the United States has concluded that the term “security” “embodies a flexible rather than a static principle” in order to meet the “variable schemes devised by those who seek the use of the money of others on the promise of profits.”[6] Nevertheless, there is current regulatory ambiguity surrounding the classification of many types of digital assets under existing securities laws. Indeed, it is more likely that the Project will fall within a new regulatory regime in the United States as alternative legal frameworks are updated or established to take into account the unique nature of blockchain development projects.[7] As recently as December 8, 2021, the industry leader, Coinbase, sent their Chief Financial Officer, Alesia Haas, to testify in front of the United States House Committee on Financial Services. The testimony articulated the inoperability of subjecting digital assets to the existing regulatory structure, and Haas highlighted the need for new rules that are uniquely tailored to address the concerns of all parties.[8]

  1. Howey Test for Investment Contracts

 The SEC has most commonly pursued actions against certain digital assets (or certain distribution schemes of such digital assets) that likely qualify as “investment contracts.” The term ‘investment contract’ is not separately defined under Section 2(a)(1) of the 1933 Act.[9] As a result, in undertaking our analysis, we reviewed various court decisions, SEC enforcement actions and other SEC communications, as we deemed relevant. Notwithstanding the authority of the SEC to determine if a digital asset falls within the classification of an “investment contract,” there is strong guidance to suggest that neither the Project, its components, the CUBEs, or the Cubies falls within the classification of a security or an investment contract as construed by the Supreme Court’s “Howey Test.”[10]

The Howey Test defined an investment contract as: a contract, transaction, or scheme containing the following elements: (i) a person invests their money; (ii) in a common enterprise; and (iii) is reasonably led to expect profits solely from the managerial or entrepreneurial efforts of the promoter or third party.[11] Under the Howey Test, “form [is] disregarded for substance and emphasis [is] placed upon [the] economic reality [of the transaction].”[12] The focus of any Howey Test analysis is not only on the form and terms of the instrument itself – the digital asset – but also on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold, including secondary market sales. In other words, the “contract, transaction or scheme” by which the token is sold may constitute an investment contract, but the object of the investment contract—the token—may not bear the hallmarks of a security.

CUBEs Under Howey

(i)        An Investment of Money?

           The monetary investment requirement is designed to capture only those investors   who have undertaken some degree of economic risk.[13] The analysis of whether CUBEs as an instrument satisfy the first prong of the Howey Test centers around the primary intention of the purchasers in obtaining the tokens – for speculative investment or for consumptive purposes. If found to be for investment purposes, it should be noted that an investment does not have to be in the form of cash. It can instead take the form of goods and services or some other exchange of value.[14] Therefore, purchasing CUBEs using other digital assets would qualify as “an investment of money.”

It was shown in United Housing Found., Inc. v. Forman that shares in a large cooperative public housing project were not deemed to be securities since the purchasers intended to acquire residential apartments for consumptive purposes rather than for investment purposes. As the shares lacked the right to receive dividends, were not negotiable, could not be pledged, did not confer voting rights in proportion to the shares owned, and did not appreciate value, they were not deemed to be investment contracts. Like the purchasers of the housing project in Forman, purchasers of CUBEs do not receive dividends or the equivalent and do not receive voting rights as a result of holding CUBEs.

Applying this concept to digital assets, the SEC has released guidance on relevant considerations and factors which may qualify an instrument offered and sold strictly for “consumption purposes” in its Framework for “Investment Contract” Analysis of Digital Assets (the “Framework”).[15] Although none of the following characteristics of use or consumption is necessarily determinative, the stronger their presence, the less likely the Howey test is met. Factors include, but are not limited to: (1) the distributed ledger network and digital asset are fully developed and operational; (2) holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use; (3) with respect to a digital asset that represents rights to a good or service, it currently can be redeemed within a developed network or platform to acquire or otherwise use those goods or services; (4) any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended functionality; or (5) the digital asset is marketed in a manner that emphasizes the functionality of the digital asset, and not the potential for the increase in market value of the digital asset.[16]

When analyzing the CUBEs under the Framework, the CUBEs function for utility or consumption purposes within the ecosystem of the Game in a variety of ways. As outlined in Section 1 – Recital of Facts, owning CUBEs allows Players to buy certain in-game assets, which, in turn, permit them to subjectively implement any number of in-game strategies. The Game, the Project, the Protocol, the distributed ledger network (Ethereum and Polygon), and the CUBEs are fully developed and operational. Holders of the CUBEs are immediately able to utilize them for their intended functionality within the Game’s ecosystem and built-in incentives exist to encourage such use. The creation and structure of CUBEs are designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network as the CUBEs can only be used on the network. Prospects for appreciation in the value of the CUBEs are limited to adoption of the Game by Players and availability of certain in-game experiences as determined by a decentralized community of Players and written by the Protocol (to be hosted and executed on the Ethereum and Polygon Network). In addition, a reasonable purchaser would not be expected to hold CUBEs for extended periods as an investment, but rather would utilize them relatively soon in order to participate in the Game.

Furthermore, along similar lines, the SEC has in fact already analyzed a similar blockchain-based gaming token under the Howey Test and determined the token at issue was found to be for consumptive purposes. In 2019, the SEC released a no-action letter against blockchain based gaming technology platform “Pocket Full of Quarters” (“PoQ”).[17] Because the token at issue in PoQ was being marketed for a “consumptive purpose,” and due to the underlying economic reality of the game/token,[18] the SEC issued interpretive guidance stating, “the Division [of Corporate Finance] will not recommend enforcement action to the Commission…in reliance on your opinion as counsel that the Quarters are not securities…”[19] This determination has allowed the PoQ project to produce a roadmap outlining the project’s intention to be listed on major United States based exchanges in 2022.[20]

The key difference between PoQ and CUBEs is that PoQ had an unlimited supply of tokens and also a fixed price per token. Nevertheless, just as was the case in PoQ, the CUBEs are to be consumed within a gaming platform for the specific purpose of allowing Players to access the Game. In its no-action letter regarding PoQ, the SEC stated, “Well-settled legal principles applied to the facts and circumstances set forth . . . establish that the sale of Quarters in [this] manner . . . does not represent a scheme devised to use the money of others on the promise of profits and thus does not constitute an “investment contract”.” It is this firm’s opinion that this interpretation of Forman (as the SEC applied such analysis in PoQ) can also be applied to CUBEs themselves, as well as their offer and sale.

After analyzing relevant case law, the Framework, and the SEC’s no action letter against PoQ, it is this firm’s opinion that the primary reason for purchasing CUBEs is not for investment purposes but rather for consumptive purposes. It follows that this firm believes any offer or sale of CUBEs would not fall under the jurisdiction of the SEC. While this purpose alone likely causes the offer and sale of CUBEs to fail the Howey Test in and of itself, the analysis of the other prongs continues immediately below. Thus, for the purposes of clarity, CUBEs do not meet the first “Investment of Money” prong of the Howey test.

               (ii)       Existence of a Common Enterprise?

In its Framework, the SEC noted that when evaluating digital assets, it typically has found that a common enterprise exists.[21] Federal courts have held that a common enterprise exists when either horizontal commonality or vertical commonality have been established. For example, the Court in Revak v. SEC Realty Corp. discussed horizontal commonality as “the tying of each individual investor’s fortunes to the fortunes of the other investors by the pooling of assets, usually combined with the pro-rata distribution of profits.”[22] On the other hand, vertical commonality can take two approaches: broad or narrow. The broad vertical approach finds a common enterprise if the success of an investor depends on a promoter’s expertise, while the narrow approach finds a common enterprise if there is a correlation between the fortunes of an investor and of a promoter.[23]

According to the Framework, the SEC does not require vertical or horizontal commonality per se, nor does it view a common enterprise as a distinct element of the term ‘investment contract.’[24] When analyzing the existence of a common enterprise in the case of CUBEs, it is this firm’s opinion that if existent at all, the common enterprise would exist under the horizontal approach. Half of all CUBEs will be released through game play and rewarded directly to Players. Any “pooled assets” can be considered as the number of outstanding CUBEs available to Players combined with the number of CUBEs already distributed throughout the Game’s ecosystem. Since Players-Purchasers’ “fortunes” would be tied to one another through actual in-game experience, it appears that any common enterprise would inherently need to be analyzed under the horizontal approach. Thus, there may be the existence of a “Common Enterprise;” however, the existence of such “Common Enterprise” does not cause CUBEs to be classified as an “investment contract” pursuant to the Howey Test. The analysis of this second prong should not be heavily weighted, as SEC generally finds the existence of a “Common Enterprise” in all instances in which digital assets are being analyzed pursuant to the Howey Test.

             (iii)      Is There a Reasonable Expectation of Profits Derived from the Efforts of Others?

 When analyzing whether purchasers of CUBEs have a “reasonable expectation of profits,” any inquiry is an objective one, focused on the transaction itself and the manner in which the digital asset is offered and sold.[25] It was held in S.E.C. v. C.M. Joiner Leasing Corp that relevant to any inquiry is “the economic reality [of the transaction] and what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect.”[26] Typically, an investor is led to expect profits when there is an expectancy of capital appreciation stemming from the development of the initial investment or an anticipated participation in earnings resulting from the use of investor funds.[27] Price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered “profit” under the Howey test.[28]

Efforts of a third party or promoter that are “undeniably significant ones [or are the] essential managerial efforts which affect the failure or success of the enterprise” will satisfy the final prong of the Howey Test.[29] In its Framework, the SEC highlighted that “Managerial and entrepreneurial efforts typically are characterized as involving expertise and decision-making that impacts the success of the business or enterprise through the application of skill and judgment.”[30] Importantly, it was held in Noa v. Key Futures, Inc. that no expectation of profit was found from the efforts of others when investors depended primarily upon the fluctuations of the [silver] market, not the managerial efforts of directors or promoters.[31]

As outlined in its Framework, the SEC has noted a number of factors that suggest when there is a reasonable expectation of profit derived from the efforts of others on behalf of the purchasers of digital assets. Factors include, but are not limited to: (1) the digital asset gives the holder rights to share in the enterprise’s income or profits, or to realize gain from capital appreciation of the digital asset; (2) purchasers reasonably would expect that a third parties’ efforts will result in capital appreciation of the digital asset and therefore be able to earn a return on their purchase; (3) the digital asset is marketed in terms that indicate it is an investment or that the solicited holders are investors; and (4) the promise (implied or explicit) to build a business or operation as opposed to delivering currently available goods or services for use on an existing network.

To reiterate, it is this firm’s opinion that the CUBEs purposes are primarily consumptive rather than investment. Importantly, it should be noted there has been no substantial marketing of the CUBEs on the part of the Company or any other third party. Any promotion on behalf of the Company has consistently been in a manner that emphasizes the functionality of the CUBEs themselves as vital to in-game experiences rather than the potential for the increase in market value of the CUBEs. Any purchasers’ expectation of profit likely is to come from market factors themselves – such as wider adoption of NFTs as a whole or at least greater adoption of NFT gaming platforms – and not from the efforts of the Company. The largest influence the Company may have over the price of CUBEs would be possibly implementing a ‘lock-up period’ on earned rewards as needed, depending on overall economic fluctuations.[32] Holding CUBEs does not give purchasers the right to participate in any profit realized by the Company, nor would a reasonable purchaser be expected to rely on the managerial or entrepreneurial efforts of the Company for an appreciation in value of their CUBEs. Because any marketing on the part of the Company has strictly stated CUBEs are primarily to be considered for consumptive or utilitarian purposes, it is again this firm’s opinion that there is not a “Reasonable Expectation of Profits Derived from the Efforts of Others” and that such prong of the Howey Test is not satisfied. Because a majority of the prongs of the Howey Test have not been met/satisfied the CUBEs and/or their offer and sale should not be considered an “investment contract” or a “security” pursuant to 2(a)(i) of the 1933 Act.

Cubies under Howey         

Regarding the NFT in question (Cubies), as of date hereof, the SEC has not published interpretive guidance on the securities implications of NFTs generally, nor has the agency pursued action against any creator of NFTs or the operator of a platform that facilitates the offer and sale of NFTs.[33] Regarding the Project, Players are incentivized to obtain the Cubies as necessary in order to “compete” or “battle” in-game and subsequently earn CUBEs. Importantly, the Protocol does not provide users with the ability to “fractionalize” any of its Cubies or other NFTs, further demonstrating a lack of a common enterprise.[34] Any appreciation in underlying value of these Cubies will largely depend on market factors and fluctuations – including the overall success or failure of NFTs as a burgeoning asset class or the popularity of the Game itself—rather than efforts of the Company.[35] It is therefore this firm’s opinion that the Project is not offering or selling securities when offering or selling its Cubies, and therefore the Project is unlikely to be subject to the requirements of Section 3(a)(1) of the Exchange Act as well.[36]

It should be noted that U.S. Courts have also found the existence of an investment contract when investors reasonably relied on a promoter’s efforts to create a secondary trading market for an instrument, even if that instrument would not have been a security on its own.[37]  Private       causes of action have recently been filed against NFT projects, their platforms, and their creators and organizers – most notably a class action lawsuit against Dapper Labs, the creator of the phenom NFT collection “NBA Top Shot Moments”—alleging securities laws violations stemming from the promotional efforts of influential organizers.[38] As the Protocol, the Game, and its governance are decentralized, the efforts of the Company can no longer be considered a material factor in the overall success of the Game or any appreciation of its underlying NFTs that may occur following sales between Players, as that will primarily depend on the decentralized community of Players and Protocol contributors. When looking at the totality of the facts, it is this firm’s opinion that the Game’s Cubies do not satisfy the definition of a “security” or “investment contract” pursuant to (i) the Securities Act; or (ii) SEC interpretive guidance.


Although there is no official interpretive guidance or relevant enforcement action undertaken by the SEC which would create a black-and-white classification of any particular “NFTs” or crypto-assets as securities, it is unlikely (under the current rules and regulations) that unique NFTs representing digital ownership of an underlying asset (or the Game’s internal “in-game” currency) would be categorized as a “security.” Furthermore, any CUBEs or Cubies distributed via mechanisms established by the Protocol would be used for consumption/utility purposes, making it further unlikely that either would be categorized as “securities.”

Players rely on the decentralized and transparent self-executing smart contracts when interacting with one another or when interacting within the Game’s ecosystem. The Company’s efforts should not be considered as a material factor regarding any appreciation in value of any individual Cubie, as the Game is primarily open-sourced and is governed by a sufficiently decentralized end-users/community via the rules of the Protocol; furthermore, CUBEs only serve to incentive Players within the Game and Protocol. Therefore, it is the opinion of this firm that this decentralized nature of the CUBEs/Cubies, coupled with consumptive nature of CUBEs/Cubies, fall outside of the classification of “securities” as contemplated by the Securities Acts. Lastly, and further demonstrating the legality of CUBES/Cubies, if CUBES/Cubies were classified as a security, these digital assets are likely to fall under a “safe harbor” or other such exemption from traditional securities regulations in the United States, as has been articulated by industry participants and by SEC Commissioner Hester Peirce in proposed safe harbor rules relating to digital assets.

It is important to note that we have relied upon the facts as they have been disclosed by the Company and its representatives. Please be advised that the legalities behind digital assets and blockchain-based development projects are rapidly developing and constantly evolving. This may result in a change to this opinion letter based upon current regulatory guidance and any future actions undertaken by the Company, the Game, the Project and/or its initial development team. This firm’s analysis is limited to and based on statutes, rules, guidance, regulations and judicial decisions as of the date of this Legal Opinion Letter. Subsequent developments could arise which may affect our conclusions. This firm has not undertaken any efforts to update this Legal Opinion Letter after the date hereof as a result of such developments. This Legal Opinion Letter may not be used, circulated, quoted or otherwise referred to or relied on without my prior written consent. This letter of opinion prepared by counsel may not be freely distributed to any person or entity without the express consent of this firm.


The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Securities law is complex and highly fact specific to any given circumstance and readers should contact an attorney for advice regarding any type of legal matter.

 [1] A non-fungible token is a way of representing ownership of unique assets digitally using blockchain technology.

[2] See William Hinman, Director, SEC Division of Corporate Finance Remarks at the Yahoo Finance All Markets Summit: When Howey Met Gary (Plastic) (June 14, 2018) available at Hinman stated, “[A]nd putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.” Although the SEC has not offered an official statement with respect to the Polygon Network, it is this firm’s opinion that the decentralized networks used to scale Ethereum also do not fall within the categorization of a “security.”

[3] The Securities Act of 1933, as amended, 15 USCS § 77a et seq.,; see also Securities & Exchange Com. V. Sunbeam Gold Mines Co., 95 F.2d 699 (9th Cir. 1938). The purpose of the Act is to provide full and fair disclosure of character of securities sold, and to prevent fraud in such sales. Section 5 of the Act determines it unlawful to offer or sell securities absent a properly filed registration statement or qualifying for an exemption.

[4] “The registration statement is designed to assure public access to material facts bearing on the value of publicly traded securities and is central to the Act’s comprehensive scheme for protecting public investors.” SEC v. Aaron, 605 F.2d 612, 618 (2d Cir. 1979) (citing SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953)), vacated on other grounds, 446 U.S. 680 (1980).

[5] The Securities Act of 1934, as amended, [hereinafter the “Exchange Act”], 15 USCS § 78a et seq. See id. at § 78b. The Exchange Act focuses on the strong public interest of providing regulation surrounding securities transactions conducted in secondary markets, such as exchanges and over-the-counter markets, as well as their participants, such as brokers and dealers. Id. at §§ 78c(a)(4)(A), (5)(A) The term broker means any person engaged in the business of effecting transactions in securities for the account of others. The term dealer means any person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise.

[6] SEC v. W. J. Howey Co., 328 U.S. 293 (1946), 299.

[7] See Hester Peirce, SEC Commissioner, Remarks at International Blockchain Congress 2020, Token Safe Harbor Proposal: Proposed Securities Act Rule 195- Time-limited Exemption for tokens (Feb 6. 2020), (available online at Hon. Peirce’s proposal defines Network Maturity as a network that is: (1) Not economically or operationally controlled and is not reasonably likely to be economically or operationally controlled or unilaterally changed by any single person, entity, or group of persons or entities under common control, except that networks for which the Initial Development Team owns more than 20% of Tokens or owns more than 20% of the means of determining network consensus cannot satisfy this condition; or (2) Functional, as demonstrated by the holders’ use of Tokens for the transmission and storage of value on the network, the participation in an application running on the network, or otherwise in a manner consistent with the utility of the network.

[8] Testimony of Coinbase Chief Financial Officer Alesia Haas, Coinbase Global, Inc., Before the U.S House Committee on Financial Services. (Dec. 8, 2021).

[9] See Securities Act, supra, note 8. Under Section 2(a)(1) of the Securities Act of 1933, as the same may be amended from time to time (the “Securities Act”), a security is defined as: “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe or purchase any of the foregoing.

[10] See Howey, supra, note 11. Under the Howey Test, “form [is] disregarded for substance and emphasis [is] placed upon [the] economic reality [of the transaction].”

[11] Id. In Howey, an offering was made for a land sales contract for units of a citrus grove development coupled with a contract for cultivating, marketing and remitting the net proceeds to the investors. Id at 299. The Court held that the offer was for more than just a fee simple interest in land, but rather an “opportunity to contribute money and to share in the profits of a large citrus fruit enterprise managed and partly owned by a third party”).

[12] Id at 298.; United Housing Found., Inc. v. Forman, 421 U.S. 837. Shares in a large cooperative public housing project were not deemed to be securities since the purchasers intended to acquire residential apartments for a consumptive purpose, rather than for investment purposes. As the shares lacked the right to receive dividends, were not negotiable, could not be pledged, did not confer voting rights in proportion to the shares owned, and did not appreciate value, they were not deemed to be investment contracts. Id. at 852-853.

[13] See Reves v. Ernst & Young, 494 U.S. 56, 67 (1990).

[14] Uselton v. Comm. Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991); see also SEC  v. Shavers, No. 4:13-CV-416, 2014 WL 4652121, at * 1 (E.D. Tex. Sept. 19, 2014) (holding that an investment of Bitcoin, a virtual currency, meets the first prong of Howey).

[15] Framework for “Investment Contract” Analysis of Digital Assets, U.S. Sec. & Exch. Comm’n (issued by the staff of the SEC’s Strategic Hub for Innovation and Financial Technology on Apr. 3, 2019),

[16] Id.

[17] See Securities and Exchange Commission Department of Corporate Finance Response, In Re: Pocket Full of Quarters, (Jul. 2019).

[18] S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. at 352, 52. Relevant to any inquiry whether the third and fourth prong of the Howey Test are satisfied are “the economic reality [of the transaction] and what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect.”

[19] See In Re: Pocket Full of Quarters, supra, note 22.

[20] See

 [21] See Framework, supra, note 20.

[22] Revak v. SEC Realty Corp., 18 F.3d. 81, 87-88 (2d Cir. 1994)

[23] See Ryan Borneman, Why the Common Enterprise Test Lacks a Common Definition: A Look Into the Supreme Court’s Decision on SEC v. Edwards, 5 U.C. Davis Bus. L.J. 16 (2005), The narrow vertical approach finds a common enterprise if there is a correlation between the fortunes of an investor and of a promoter. The broad vertical broach finds a common enterprise if the success of an investor depends on a promoters expertise. Id.

[24] See Framework, supra, note 20.

[25] Id.

[26] S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. at 352, 52.

[27] See Forman, at 852-53, cited supra note 17.

[28] See Framework, supra, note 20.

[29] SEC v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir. 1973); but cf. Noa v. Key Futures, Inc., 638 F.2d 77 (9th Cir. 1980)

[30] See Framework, supra, note 20.

[31] Noa v. Key Futures, Inc., 638 F.2d 77 (9th Cir. 1980).

[32] See Tokenomics, supra, note 7.

[33] See Re: Rulemaking Regarding Non-Fungible Tokens, Sustainable Holdings/Arkonis Capital, LLC.,

[34] See Adarsh Vjayakumaran, Democratizing NFTs F-NFTs, DAOs and Securities Law, University of Richmond Journal of Law and Technology, Blog Post, nfts-f-nfts-daos-and-securities-law/. “The problem with the fractionalization of NFTs is that it is not always necessary that the fractional NFTs (“F-NFTs”) are diluted at a truly democratic level. With the earlier full owners acting as “promoters” (or managing the vault) for the original NFT or advertising the fraction as a speculative investment, accompanied by the suggestion that the original NFT or the F-NFT will increase in value (view to profit) as a result of the actions of the issuer or the promoter, the F-NFTs might as we be treated as units of a collective investment scheme as defined under section 11AA of the SEBI Act or as an “investment contract” under the Howey’s test.”

[35] See SEC v. Glenn W. Turner Enter., Inc., supra, note 34; See also Noa v. Key Futures, Inc., supra, note 36.

[36] 17 CFR § 240.3a1-1. Exemption from the definition of “Exchange” under Section 3(a)(1) of the Act. If an NFT is a security, the platform facilitating the sale and secondary trading of the NFT may have to register with the SEC as an exchange. Section 3(a)(1) of the Exchange Act defines an “exchange” as “any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood…”

[37] See Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230 (2d Cir. 1985).

[38] See Friel v. Dapper Labs, Inc, et. al., Supreme Court of the State of New York County of New York, Index No: 653134/2021, (Filed, May 12, 2021). system=prod.


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Phone: 904-234-5653

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