Why Does the SEC Prefer the Horizontal Commonality Test in Most Enforcement Actions?
The SEC generally prefers the horizontal commonality test in most enforcement actions involving crypto offerings because it is easier to prove in the context of an Initial Coin Offering (ICO) or token sale. Most ICOs involve a large number of investors whose funds are pooled together to finance the project, and they all expect to share in the overall success of the project.
This pooling and pro-rata sharing directly satisfies the horizontal test, making it a straightforward legal argument for establishing the "common enterprise" prong of the Howey Test.
Glossar
Horizontal Commonality Test
Framework ⎊ The Horizontal Commonality Test, within the context of cryptocurrency derivatives and financial markets, assesses the degree of correlated price movements across seemingly disparate assets or contracts.
Enforcement
Regulation ⎊ Enforcement within cryptocurrency, options trading, and financial derivatives primarily manifests as the application of existing securities laws and the development of novel frameworks to address unique risks.
Horizontal Commonality
Convergence ⎊ The concept of Horizontal Commonality, within cryptocurrency derivatives and financial markets, signifies the observable alignment of underlying asset price movements across seemingly disparate instruments.
SEC
Jurisdiction ⎊ The Securities and Exchange Commission (SEC), within the context of cryptocurrency, options trading, and financial derivatives, primarily functions as the regulatory body responsible for enforcing federal securities laws.
Enforcement Actions
Action ⎊ Enforcement actions refer to the formal legal and regulatory proceedings initiated by government agencies, such as the SEC or CFTC, against entities or individuals involved in the cryptocurrency, options trading, and financial derivatives markets.