The Intersection of Digital Assets and Securities Laws: Understanding the Mechanics

digital assets and securities law

Securities Act

Pursuant to the Securities Act of 1933 (the “Securities Act”), it is illegal to offer or sell securities in the United States unless the offer or sale is: (i) made pursuant to an effective registration statement[1] filed by the issuer with the Securities and Exchange Commission (the “SEC”), or (ii) is exempt under federal securities law.[2]

Existing Federal Legal Framework For The Analysis Of Digital Assets As Securities

The Supreme Court of the United States (“Scotus”) 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.”[3] Currently, significant regulatory ambiguity surrounds the classification of many types of digital assets or cryptocurrencies (“Digital Assets”) under existing federal securities laws, especially around the facts and circumstances that merit enforcement actions (at least from the perspective of the SEC).[4] 

In conducting its analysis, this firm considered: (i) unofficial guidance issued by the SEC pertaining to digital assets, specifically, the Framework; (ii) relevant enforcement actions made to-date by the SEC pertaining to Digital Assets; (iii) the necessary SCOTUS case law, which serve to interpret certain federal securities laws; and (iv) the Securities Act and Exchange Act themselves.

The SCOTUS interpretation of the term “security,” as provided above, was established in the SEC v. W. J. Howey Co. case in 1946. For the purposes of this discussion, the analysis of securities with respect to digital assets will center around that case ruling and the SEC’s use of the Howey test, as discussed in subsection 2 of this section. However, we would first like to note the following general principles of securities law.

General Principles of Securities Law

Presence of Issuer

The general guidelines used by commentators to classify a “security” stem from criteria suggested by Professor Ronald J. Coffey in his 1967 law review, The Economic Realities of a “Security” Is There a More Meaningful Formula?[5] Professor Coffey argued a security to be a “transaction whose characteristics distinguish it from the generality of transactions so as to create a need for the special fraud procedures, protections, and remedies provided by the securities laws.”[6] However, courts have often found difficulty in providing a definitive rule on how to determine whether a transaction meets the “special need” criteria of Coffey’s definition. Drawing from these challenges, Professor Scott FitzGibbon proposed that a security is “a financial instrument eligible to participate in a public market.”[7] Within this test, “instrument” is suggested to mean “a set of rights and duties conferred (or purported to be conferred) by one party upon another, under circumstances such that the rights and duties would normally be treated as a unit and would normally be transferred, if at all, as a unit. The term ”instrument” also includes the documents reflecting such rights and duties.”[8] It is important to note that the rights or duties described by FitzGibbon that compose a “security” only exist in the presence of an identifiable issuer of said security. Thus, the concept of an independent security absent an issuer does not exist. Even in the case of a security having multiple issuers, each of those entities must be distinguishable under U.S. securities law (at least on a pre-crypto basis).[9]

Presence of Instrument

Generally, it is principle that for there to be a security, there must be an opposite party against which rights can be enforced, as supported by the use of the term “instrument” in the definition of “security” provided by both the Securities Act and the Exchange Act.[10] Accordingly, the term is frequently referenced by the Supreme Court and the SEC when discussing securities and is used to describe investment contracts numerous times throughout the Exchange Act.[11]

Despite the recurrent use of the term “instrument” by both the Securities Act and Exchange Act when explaining securities, the word itself is not explicitly defined in either but rather considered to be commonly understood. Black’s Law Dictionary defines an instrument as “[a] written legal document that defines rights, duties, entitlements, or liabilities, such as a statute, contract, will, promissory note, or share certificate.”[12] Similarly, the Cornell Law School Legal Information Institute defines an instrument as a “written legal document that records the formal execution of legally enforceable acts or agreements, and secures their associated legal rights, obligations, and duties.[13] The essential element of an instrument, as apparent in these established definitions, is the existence of written documentation evidencing a legal arrangement between parties. The presence of such written instruments allows third parties, such as courts or prospective transferees, to understand the rights and duties of the security holder and involved parties negotiated and established by the legal arrangement.

Thus, the general principles of securities law establish that for there to be a security, there must be elements of both an issuer and an instrument/writing evidencing an agreement between two or more parties. There is no case law to support an open blockchain network being an instrument.

Howey Test for Investment Contracts

The SEC has primarily pursued actions against certain Digital Assets (or certain distribution schemes of such Digital Assets) that likely qualify as “investment contracts.” In deciding when a financial instrument or transaction constitutes a security, the SEC relies on the 1946 case ruling of the Securities and Exchange Commission v. W. J. Howey Co., which established a test to determine if an investment is a security, coined the “Howey test.”[14]

The term “investment contract” is not separately defined under Section 2(a)(1) of the 1933 Act, but rather was interpreted through SCOTUS case-law; at the time of the Howey case, the term was prevalent throughout many state ‘blue sky’ laws in which state courts molded its meaning to provide an umbrella of investor protection in various cases. In State v. Gopher Tire & Rubber Co., an investment contract is described as a contract or scheme for “the placing of the capital or laying out of money in a way intended to secure income or profit from its employment.”[15] This definition was uniformly adopted by state courts and applied to  “a variety of situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of someone other than themselves.”[16]

Ultimately the Supreme Court decided that the meaning of the term “investment contract” was crystallized by such state case interpretations and concluded the definition of an investment contract to be 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.[17]

Importantly, SCOTUS has maintained that when conducting such an analysis, “[f]orm [is] disregarded for substance and emphasis [is] placed upon [the] economic reality [of the transaction].”[18] 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/Digital Asset is sold may constitute an investment contract, but the object of the investment contract—the token—may not bear the hallmarks of a security.[19]

Investment Of Money

The investment requirement of the Howey Test is meant to capture only investors who have undertaken some degree of economic risk.[20] As stated in S.E.C. v. Friendly Power Co. LLC, “An ‘investment of money’ refers to an arrangement whereby an investor commits assets to an enterprise or venture in such a manner as to subject himself to financial losses.”[21]

That is to say, “[a]n ‘investment’ typically involves parting with money for the purpose and in reasonable expectation of making a profit.”[22] That is,“[t]he determining factor is whether an investor ‘chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security.’”[23] Thus, determining whether any purchaser of SHD or Silk Tokens was making an “investment of money” when purchasing the tokens will require “an objective inquiry into the character of the instrument or transaction offered based on what the purchasers were ‘led to expect,’”[24] including “an analysis of the promotional materials associated with the transaction.”[25]

The Framework further clarifies this prong of the test as it applies to Digital Assets and provides relevant considerations and factors which may qualify an instrument offered and sold strictly for “consumption purposes.”[26] Although none of the following factors are necessarily determinative, the stronger the presence of the factors, the less likely the Howey Test is met. Factors include, but are not limited to:

  • The distributed ledger network and Digital Asset are fully developed and operational;
  • Holders of the Digital Asset can immediately use it for its intended functionality on the network, particularly where there are built-in incentives to encourage that use;
  • Creation and structure of the Digital Asset are designed and implemented to meet the needs of its users, rather than to feed speculation regarding its value or development of its network;
  • Digital Assets that represent rights to a good or service can currently be redeemed within a developed network or platform to acquire or otherwise use those goods or services;
  • 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;
  • The Digital Asset is marketed in a manner that emphasizes its functionality and not the potential for the increase in its market value;
  • Potential purchasers can use the network and use (or have used) the Digital Asset for its intended functionality; or
  • Restrictions on the transferability of the Digital Asset are consistent with the asset’s use and not with facilitating a speculative market.


The Framework also expanded on this definition stating, “the lack of monetary consideration for digital assets, such as those distributed via a so-called ‘air-drop,’ does not mean that the investment of money prong is not satisfied; therefore, an airdrop may constitute a sale or distribution of securities.”[27]

In enforcement actions against and Munchee, two blockchain based projects, the SEC has only analyzed the “investment of money” prong of the Howey Test in passing, most significantly noting that an “investment of money” need not be in the form of cash and can be in the form of cryptocurrency.[28] In the case of, the management team explicitly stated that the tokens conferred ownership and voting rights, that the entity would be run as a for-profit entity, and that buying tokens was comparable to buying shares in a company and getting dividends.[29] Meanwhile in the case of Munchee, the company made public statements or endorsed other peoples public statements that touted the opportunity to profit from purchasing the tokens, promised to make sure the token would be tradable on a number of US-based exchanges within 30 days of the offering, and promised to buy and sell Munchee Tokens using its retained holdings to ensure there was a liquid secondary market for the Tokens.[30]

Common Enterprise

In the Framework, the SEC noted that when evaluating Digital Assets, the regulatory agency typically finds that a “common enterprise” exists in the overwhelming majority of circumstances.[31] However, Federal courts are in disagreement over the analytical approach to determining whether a common enterprise exists. A number of circuits have chosen to apply the “horizontal commonality”[32] test, while others have chosen to use the “broad vertical commonality,” or the “narrow vertical commonality tests.”

In Revak v. SEC Realty Corp., the SCOTUS described 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.”[33] 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.[34] The Framework acknowledges, but ultimately dismisses, these two tests, stating that “[t]he SEC does not specifically require either horizontal or vertical commonality, and states that generally, investments in digital assets constitute investments in a common enterprise because the fortunes of digital asset purchasers have been linked to each other or to the success of the promoter’s efforts.”[35] Given the Framework’s extremely broad approach, it is safe to assume that meeting any test, vertical or horizontal, would suffice for a finding of the existence of a common enterprise.

Reasonable Expectation of Profit Derived from the Efforts of Others.

Per the Framework, the primary concern that the SEC (or any regulatory body) evaluates when analyzing a digital asset pursuant to the Howey Test “is whether a purchaser has a reasonable expectation of profits (or other financial returns) derived from the efforts of others.”[36]

When evaluating reasonable expectation of profit exists, SCOTUS has held in United Housing v. Forman that where a purchaser is not “attracted solely by the prospects of a return on his investment . . . [but] is motivated by a desire to use or consume the item purchased, . . . the securities laws do not apply.”[37] Typically, an investor is led to expect profits when there is an expectation of capital appreciation stemming from the development of the initial investment or an anticipated participation in earnings resulting from the use of investor funds.[38] “Profits can be . . . capital appreciation resulting from the development of the initial investment or business enterprise or a participation in earnings resulting from the use of purchasers’ funds,”[39] but exclude “[p]rice appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset.”

The Framework further hones this prong of the test for digital assets, stating that the 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. It labels a “promoter, sponsor, or other third party (or affiliated group of third parties) provid[ing] essential managerial efforts that affect the success of the enterprise” an “Active Participant” or “AP.”[40]

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.”[41] 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.[42]

On July 21, 2022, the SEC filed a complaint (the “Wahi Complaint”) against former Coinbase employee Ishan Wahi, his brother Nikhil Wahi, and friend Sameer Ramani, on insider trading allegations.[43] Ishan is accused of feeding the associated defendants with confidential information regarding upcoming crypto assets to be listed on the Coinbase exchange. Notably, within the Wahi Complaint, the SEC names nine crypto assets that were traded as “crypto asset securities;” however, neither the issuers of those assets nor the trading platforms they were listed on were named in the case. The allegations state that these assets “were offered and sold to investors who made an investment of money in a common enterprise, with a reasonable expectation of profits to be derived from the efforts of others;” therefore, the defendants “traded in securities subject to federal securities law because these crypto assets were investment contracts.”[44] In the Wahi Complaint, the SEC states:

“Each of the nine crypto asset securities were offered and sold by an issuer to raise money that would be used for the issuer’s business.  In the offerings, the issuers directly sold crypto asset securities to investors in return for consideration …. The crypto asset securities then were issued and distributed to the investors’ blockchain addresses.  The issuers and their promoters solicited investors by touting the potential for profits to be earned from investing in these securities based on the efforts of others.  These statements focused on, among other things, the value of the token at issue and the ability for investors to engage in secondary trading of the token, with the success of the investment depending on the efforts of management and others at the company.  … Each of the nine companies that offered these crypto asset securities and their promoters further emphasized, among other things, their efforts to get their crypto asset securities listed on secondary trading platforms, and the critical role that executives and others at the company played in turning the company into a success, thereby increasing the value of the crypto asset security.  In other words, each of the nine companies invited people to invest on the promise that it would expend future efforts to improve the value of their investment.”[45]

CFTC Commissioner Caroline Pham criticized the SEC for bringing this action, stating “the case SEC v. Wahi is a striking example of “regulation by enforcement.”  The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities.”[46] This is the first case in which the SEC enforcement action alleged that a secondary transaction in a crypto asset constituted a securities transaction.

For the purposes of this legal background, we would also like to reference the statutory definitions for a “sponsor” and “promoter,” which were referenced in the Framework.

“Sponsor” is defined in the Code of Federal Regulations (CFR) as “. . . the person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuing entity.”[47]

“Promoter” is defined in the Code of Federal Regulations (CFR) as:

  • [A]ny person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or
  • Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, ten percent (10%) or more of any class of securities of the issuer or ten percent (10%) or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.[48]

Courts have further clarified that “[t]o be found a promoter within the meaning of that subsection, one must either be active in the issuer’s business . . . or actively engaged in the formation of the issuer.”[49]

Lastly, the Framework lays out a set of factors whose presence increases the likelihood that a purchaser of a digital asset is relying on the efforts of others. These factors will be discussed in the legal analysis section below in detail.

Stable Coins

A stablecoin is a type of cryptocurrency hosted on the blockchain and managed by a smart contract, designed to maintain a stable value relative to a target price of an external reference asset.[50] Stablecoins attempt to solve the problem of high volatility common among other cryptocurrencies, making them better suited as a medium of exchange. Stablecoins have also proven beneficial for trading and saving assets, earning interest, transferring money, and the international exchange of currency.

The International Organization of Securities Commissions (“IOSCO”) notes four distinct types of stablecoins: fiat currency, other real-world assets, crypto assets, and algorithmic/overcollateralized controlled assets.[51] The IOSCO has made the claim that  stablecoins should be considered crypto-assets rather than cryptocurrency, because they generally do not meet the economic criteria of money; however, when stablecoins function successfully, they often do fulfill the criteria as “a unit of account, a stable store of value and efficient means of exchange.”[52] Stablecoins are generally always tokenized, fungible, tradable, and convertible; the types may differ from each other in the following characteristics: number of coins, custodial type, management type, blockchain automation, coin minting and burning, collateral type, collateralization level, stabilization mechanism, oracle dependence, blockchain independence, and regulatory accessibility.[53]

Fiat currency-backed stablecoins hold cash-equivalent collateral of a designated fiat currency, while non-currency asset-backed types hold reserves of other non-currency assets or financial “vehicles” that track the price of the assets. Crypto backed stablecoins hold collateral through other types of volatile cryptocurrencies. Overcollateralized/algorithmic stablecoins use formulas or smart contracts to automatically control the supply of tokens and maintain their peg, combining ERC-20 smart contracts and functionalities, such as minting and burning, and oracle contracts, that enable the contract to communicate outside the blockchain.[54]

The functionality and architecture of the stablecoin is handled on-chain via smart contracts, allowing the stablecoin to be decentralized. U.S. Senator Pat Toomey of Pennsylvania shared some of the benefits of stablecoins at a recent Senate Committee on Banking, Housing, And Urban Affairs saying “Stablecoins can speed up payments, especially cross-border transfers, reduce costs, including remittances, and help combat money laundering and terrorist financing through an immutable and transparent transaction record. Stablecoins can also be programmed and made interoperable with other currencies, creating efficiencies to improve access to financial services for more Americans.”[55] Shortly after the Hearing, Toomey introduced a bill that would provide a regulatory framework for “payment stablecoin” issuers in the US.[56]

Current Regulatory Environment

The total stablecoin supply saw an estimated 495 percent increase between October 2020 to October 2021; the total stands at over $142 billion as of October 8, 2022,[57] functioning primarily as a means to facilitate trading, lending, and borrowing of other digital assets. Companies like Circle and Coinbase are also using and accepting stablecoins as a means of payment; USDC operator Circle recently launched “Circle Accounts,” allowing business clients to deposit, withdraw, receive, and store digital assets and settle all payments in USDC. Following the launch, the number of active Circle Account customers increased by 213% in a little less than a year.[58]

The rapid growth of the industry has caught the attention of many policy makers and regulators as the sector currently operates without clear legislative oversight. The United States Treasury published an analysis of stable coins in November 2021 outlining the use cases and possible risks of the asset, urging Congress to “act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.”[59] Shortly after, on March 9th, 2022, President Joe Biden  issued his Executive Order on Ensuring Responsible Development of Digital Assets[60] in which he called for a whole-of-government approach to address the accompanying risk and benefits of digital assets and their technological framework.

In the meantime, several bills proposing regulatory frameworks for stablecoins have been introduced. On February 15, 2022, U.S. Congressman Josh Gotthiemer of New Jersey released a discussion draft of the Stablecoin Innovation and Protection Act of 2022, proposing legislation that will focus on defining qualified stablecoins and putting appropriate protections in place for consumers and investors.[61] Similarly, H.R. 7328, a bill proposal that would establish reporting requirements for stablecoin issuers and restrict the type of assets that could back a stablecoin, was introduced in March 2022. Due to the wide range of approaches among these bills and lack of clear support for any one of them, we will not be considering them as relevant legal material for the purposes of this letter. Notwithstanding the forgoing, we wanted to introduce these concepts and note that the United States government has been inconsistent and unclear with any guidance related to stablecoins classification as a security.

The current regulatory environment is ambiguous with respect to both stablecoins and cryptocurrency tokens as the diverse functionalities of such assets make current practices such as the Howey test difficult to interpret. The SEC enforcement actions against the crypto industry have been incohesive and non-uniform in their interpretation of both the Howey test and the Securities Act; one could even argue that in some recent cases, the Securities Act was used in an arbitrary and capricious manner. The threat of this unclarity was recently expressed by former SEC Chairman Arthur Levitt (who served from 1993 to 2001) in a Wall Street Journal article titled A New Framework for Crypto Regulation.[62] Levitt explains that regulators, such as the SEC, who have acted against various crypto players claim that they are simply upholding the laws governing securities, a classification they believe such crypto assets qualify under. However, many of the largest players in Crypto believe those laws to be “outmoded, unclear or irrelevant,” a regulatory standoff that Levitt believes poses a risk to blockchain and crypto-technology innovation. Notably, the former Chairman commented on the “thorniness” of the Howey test when applied to Web3 decentralization, arguing that while the principles of the test are sound and fitting for other markets, they don’t address all questions raised by the equivocal nature of digital assets. Levitt suggests that the SEC and federal regulators work towards an entirely new regulatory framework and provide further guidance that will “help make the SEC’s enforcement efforts more precise, predictable and fair.”[63] The article comes during what Levitt refers to as a “critical juncture,” as the crypto winter is filled with unprotected and unhappy investors hurt by the lack of industry regulation.

The regulatory environment surrounding digital assets is complex. Contact us if you have questions or legal needs surrounding this topic.

[1] “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).

[2] 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.

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

[4] @HesterPeirce, Twitter, (May 5, 2022 11:10 AM) Hon. Hester Peirce, Commissioner of the SEC, stated in a reply to the SEC’s official Twitter, “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with enforcement in crypto?”

[5] Ronald J. Coffey, The Economic Realities of a “Security”: Is There a More Meaningful Formula?, 18 W. RES. L. Rev. 367 (1967).

[6] Id.

[7] Scott FitzGibbon, What is a Security? A Redefinition Based on Eligibility to Participate in the Financial Markets, 64 Minn. L. Rev. 893 (1980).

[8] Id.

[9] See, e.g., General Instructions to SEC Form D (“If more than one issuer has sold its securities in the same transaction, all issuers should be identified in one filing with the SEC”).

[10] See Securities Act of 1933 § 2(a)(1), 15 U.S.C. § 77b(a)(1) (2018) (“The term “security” means 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 group 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 to or purchase, any of the foregoing.” (emphasis added)). See also Securities and Exchange Act of 1934 § 3(a)(10), 15 U.S.C. §78(c)(a)(10) (2012) (The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group 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 instrument commonly known as a “security” (emphasis added)).

[11] See S.E.C. v. Edwards, 540 U.S. 389, 393-94 (2004) (explaining that a security includes “virtually any instrument that might be sold as an investment.” (emphasis added)). See also  “Framework for “Investment Contract” Analysis of Digital Assets” (“The term ‘security’ includes an ‘investment contract,’ as well as other instruments such as stocks, bonds, and transferable shares.” and “The focus of the Howey analysis is not only on the form and terms of the instrument itself.”) (emphasis added). See generally Exchange Act of 1934, 15 U.S.C. § 78a (1934) (referring to the term “instrument” frequently to describe investment contracts).

[12] Black’s Law Dictionary, Second Edition, published in 1910 prior to the enactment of the Securities Acts, defined “instrument” as: A written document; a formal or legal document in writing, such as a contract, deed, will, bond, or lease.  State v. Phillips, 157 Ind. 4S1, 62 N. E. 12; Cardenas v. Miller, 108 Cal. 250, 39 Pac. 783, 49 Am. St Rep. 84; Benson v. McMahon, 127 U. S. 457, 8 Sup. Ct. 1240, 32 L. Ed. 234; Abbott v. Campbell, 60 Neb. 371, 95 N.W. 592.

Cf. Black’s Law Dictionary, Third Edition, published in 1933, which defined “instrument” as: A document or writing which gives formal expression to a legal act or agreement, for the purpose of creating, securing, modifying, or terminating a right; a writing executed and delivered as the evidence of an act or agreement.

[13] Legal Information Institute, Instrument, Cornell Law School (last accessed Dec. 3, 2022),

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

[15] State V. Gopher Tire & Rubber Co., 146 Minn. 52, 56, 177 N.W. 937,938.

[16] See Legal Information Institute, Securities and Exchange Commission V. W. J. Howey Co. et al., Cornell Law School (last accessed Nov. 6, 2022), See also State v. Evans, 154 Minn. 95, 191 N.W. 425, 27 A.L.R. 1165; Klatt v. Guaranteed Bond Co., 213 Wis. 12, 250 N.W. 825; State v. Health, 199 N.C. 135, 153 S.E. 855, 87 A.L.R. 37; Prohaska v. Hemmer-Miller Development Co., 256 Ill.App. 331; People v. White, 124 Cal.App. 548, 12 P.2d 1078; Stevens v. Liberty Packing Corp., 111 N.J.Eq. 61, 161 A. 193. See also Moore v. Stella, 52 Cal.App.2d 766, 127 P.2d 300.

[17] See Howey, supra note 3. 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. 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

[18] Id.

[19] See Framework, supra note 26.

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

[21] S.E.C. v. Friendly Power Co. LLC, 49 F. Supp. 2d 1363, 1368–69 (S.D. Fla. 1999) (citing Stowell v. Ted

  1. Finkel Inv. Servs., Inc., 489 F.Supp. 1209, 1224 (S.D. Fla. 1980)).

[22] Securities and Exchange Commission v. Energy Group of America, Inc., 459 F. Supp. 1234, 1239 (S.D. N.Y. 1978).

[23] U.S. Securities & Exchange Commission v. Hui Feng, 935 F.3d 721, 729 (9th Cir. 2019), cert. denied, 141 S. Ct. 1387, 209 L. Ed. 2d 127 (2021) (quoting Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir2009) (quoting Howey, 328 U.S. at 298–99, 66 S.Ct. 1100)).

[24] Warfield, 569 F.3d at 1015, 1021 (9th Cir. 2009) (quoting Howey, 328 U.S. at 298–99, 66 S.Ct. 1100).

[25] U.S. Securities & Exchange Commission v. Hui Feng, 935 F.3d 721, 729 (9th Cir. 2019), cert. denied, 141 S. Ct. 1387, 209 L. Ed. 2d 127 (2021) (quoting Warfield, 569 F.3d 1015, 1021 (9th Cir. 2009)

(quoting Howey, 328 U.S. at 298–99, 66 S.Ct. 1100)).

[26] 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). (last visited August 4, 2022).

[27] See Framework, supra note 26, (The Framework states that “in a so-called ‘airdrop,’ a digital asset is distributed to holders of another digital asset, typically to promote its circulation.”)

[28] The DAO, Securities Exchange Act Release No. 81207 (Jul. 25, 2017) [herein after The DAO Report], (last visited August 7, 2022); Munchee Inc., Securities Act Release No. 10445 (Dec. 11, 2017) [hereinafter Munchee Order], (last visited August 7, 2022). token holders used ETH to purchase their tokens, whereas Munchee token holders used ETH and BTC to purchase the tokens.

[29] See The DAO Report, supra note 28, at 4.

[30] See Munchee Order, supra note 28, at 5-8.

[31] See Framework, supra note 26.

[32] See Ethanol Partners Accredited v Wiener, Zuckerbrot, Weiss & Brecher (1985, ED Pa) 635 F Supp 18, CCH Fed Secur L Rep ¶ 92894; Marini v. Adamo, 812 F. Supp. 2d 243, Fed. Sec. L. Rep. (CCH) P 96542,

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

[34]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 promoter’s expertise.

[35] See Framework, supra note 26.

[36] Id.

[37] See United Hous. Found., Inc. v. Forman, 421 U.S. 837, 852-53 (1975). In Forman, 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

[38] Id.

[39] See Framework, supra note 26.

[40] Id.

[41] Id.

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

[43] SEC v. Wahi, No. 2:22-cv-01009 (W.D.Wash. Jul. 21, 2022),

[44] Id. at p. 21.

[45] Id. at p. 22.

[46] Statement of Commissioner Caroline D. Pham on SEC v. Wahi, Commodities Future Trading Commission (July 21, 2022),

[47] 17 C.F.R. § 229.1101(l).

[48] Securities Act of 1933, Rule 405, 17 C.F.R. § 230.405

[49] Ingenito v. Bermec Corp., 441 F. Supp. 525, 537 (S.D.N.Y. 1977). See also Shawnee Chiles Syndicate, 10 S.E.C. 109, 115 (1941); and American Tung Grove Developments, Inc., 8 S.E.C. 51, 56 (1940).

[50] Stablecoins: Coinbase White Paper, Coinbase (July 2022),

[51] The Board of the International Organization of Security Commissions (2020) Global Stablecoin Initiatives.

[52] Peter Mell and Dylan Yaga, Understanding Stablecoin Technology and Related Security Considerations, National Institute of Standards and Technology Internal Report (Oct. 2022),

[53] Id.

[54] A beginner’s guide on algorithmic stablecoins, Coin Telegraph (last accessed Oct. 28 2022),

[55] Sen. Pat Toomey (R-Pa), Full Committee Hearing: Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?, United States Senate Committee On Banking, Housing, And Urban Affairs (Dec. 14 2021, 10:00 AM),

[56] Congressional Research Service, Algorithmic Stablecoins and the TerraUSD Crash (May 16, 2022),

[57] The Block, Stablecoins (last updated Oct. 8, 2022),

[58] Circle Blog, USDC Market Cap Grows to More than $50 Billion (February 2, 2022),

[59] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, Report on Stablecoins (Nov. 1, 2021), available at

[60] Fact Sheet: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets, The White House (Mar. 09, 2022),

[61] Press Release, Gottheimer Announces “Stablecoin Innovation And Protection Act,” Critical New Cryptocurrency Legislation, Josh Gottheimer: New Jersey’s 5th District (February 15,2022),

[62] Aruther Levitt and Ram Ahluwalia, A New Framework for Crypto Regulation, Wall Street Journal (Oct. 20, 2022. 6:48 PM),

[63] Id.

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