How Does the ‘Howey Test’ Apply to Determining a Token’s Classification?

The Howey Test is a four-pronged legal standard used to determine if a transaction qualifies as an "investment contract," and thus a security. The criteria are: an investment of money, in a common enterprise, with an expectation of profit, derived solely from the efforts of others.

If all four elements are met, the token is deemed a security and subject to strict regulation. Issuers of utility tokens aim to demonstrate that the token's value is based on its use, not purely on speculative profit.