The Howey test is a legal test used to determine whether an investment contract exists and, therefore, whether certain securities laws apply. The test is named after a U.S. Supreme Court case called SEC v. W.J. Howey Co., in which the Court set out a four-part test to determine whether an investment contract exists.
The four elements of the Howey test are:
- There is an investment of money.
- The investment is made in a common enterprise.
- There is an expectation of profits from the investment.
- The profits are to be derived from the efforts of others.
If all four elements are present, the investment is considered to be an investment contract and is subject to securities regulation. The Howey test is used by the U.S. Securities and Exchange Commission (SEC) to determine whether a particular investment is a security and whether it must be registered with the SEC. The test is also used by the courts to determine whether a particular investment is a security and whether it is subject to securities laws.
*Written by OpenAI's ChatGPT - Not Legal Advice*