How Does the ‘Howey Test’ Apply to DAO-issued Tokens?
The Howey Test is a US Supreme Court standard used to determine if a transaction qualifies as an "investment contract," and thus a security. It asks if there is an investment of money in a common enterprise with the expectation of profits to be derived from the efforts of others.
If a DAO's token meets these criteria, it is a security and subject to federal securities laws.
Glossar
Expectation of Profits
Expectation ⎊ The expectation of profits criterion focuses on whether purchasers of a crypto asset are motivated by the prospect of financial return derived from the efforts of others.
Investment of Money
Allocation ⎊ Investment of money within cryptocurrency, options trading, and financial derivatives represents a strategic deployment of capital predicated on anticipated risk-adjusted returns, differing substantially from traditional asset classes due to inherent volatility and regulatory uncertainty.
Howey Test
Investment ⎊ Contract analysis hinges on demonstrating the presence of an investment of money in a common enterprise with an expectation of profits derived substantially from the efforts of others.