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At Torres & Zheng at Law, P.C., we advise a wide range of clients on securities and IPO matters. Recently, as digital assets continue to gain attention, we have received an increasing number of inquiries from cryptocurrency companies preparing for an IPO. A key question that continues to arise is whether a token offering will be considered as a securities offering and, as a result, fall under the regulation of U.S. securities laws.
This blog provides a preliminary analysis based on the Howey Test approach, exploring each of its key factors, discussing how courts have applied them, and offering illustrative examples to highlight when a token offering may be considered a securities offering under U.S. securities laws.
The Rule: The Howey Test
Courts have increasingly turned to the framework established in SEC v. W.J. Howey Co.[1] to assess token offerings. Yet, despite years of enforcement activity, no binding Supreme Court or federal appellate decision has definitively answered whether a token constitutes a security.
Under the Securities Act of 1933 § 2(a)(1) and the Securities Exchange Act of 1934 § 3(a)(10), the term “security” includes an “investment contract.” The Supreme Court in Howey held that an investment contract exists if a transaction involves:
- An investment of money;
- In a common enterprise;
- With a reasonable expectation of profits derived from the efforts of others.
The Court has emphasized that form must yield to substance, and the focus should be on the economic reality of the transaction.[2] This principle has guided lower courts in applying the Howey test to digital asset offerings, including SEC v. Kik Interactive Inc.[3], SEC v. Telegram Group Inc.[4], and SEC v. Ripple Labs, Inc[5].
The Three Prongs of the Howey Test
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An Investment of Money
Courts have generally found that exchanging fiat or other digital assets for tokens satisfies this element. Intent to “invest” is not required; providing capital or consideration is sufficient.
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Common Enterprise
A common enterprise may be established through “horizontal commonality,” where investor fortunes rise and fall together. In SEC v. Kik Interactive Inc.[6], pooling investor funds to build an ecosystem satisfied this requirement, even without formal profit-sharing. Similarly, many token projects link token value to ecosystem growth, which may support this prong.
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Expectation of Profits from the Efforts of Others
The third prong of the Howey test asks whether purchasers were led to expect profits derived from the entrepreneurial or managerial efforts of others. In recent token cases, courts have looked closely at the issuer’s communications and the economic reality of token distribution.
For example, in SEC v. Ripple Labs, Inc.[7], the court distinguished between Institutional Sales, where Ripple’s marketing and contractual restrictions supported an expectation of profits, and Programmatic Sales, where anonymous buyers were less likely to have relied on Ripple’s efforts, as such buyers often cannot know whether proceeds went to the issuer.
Practical Implications
Because courts scrutinize white papers, websites, blog posts, roadshow materials, and executive statements, token issuers face significant risk if their communications suggest investment potential. Several “red flag” examples emerge from prior cases:
- Linking Token Value to the Issuer’s Efforts: for example, when the issuer highlights the professional team’s efforts that would develop the token’s ecosystem.
- Lock-up Provisions: for example, when the institutional buyers agreed to lock-up restrictions, which the court found inconsistent with immediate consumptive use and more aligned with investment purposes.
- “Funds raised” Language: Using token sales to raise capital may point toward the token being treated as a securities offering, for instance, when the issuer describes the funds as supporting operations or ecosystem growth.
Final Thoughts
The legal landscape around digital assets remains uncertain and continues to evolve, as well as the regulatory environment. Recently, on July 31, 2025, SEC Chair Atkins noted in a public speech that only a limited number of crypto assets should be treated as securities under federal law[8]. Since the Trump administration took office, regulators seem to be taking a more crypto-friendly approach. Still, because perspectives and enforcement priorities can shift quickly, it is essential to carefully evaluate both the structure of a token offering and the promotional language used before launch. If you have any questions or concerns, our team is here to help guide you through the process.
Authors: Nick L. Torres, Esq. and Jean Huang
Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.
[1] See SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
[2] See Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).
[3] See SEC v. Kik Interactive Inc., 492 F. Supp. 3d 169, 178–80 (S.D.N.Y. 2020).
[4] See SEC v. Telegram Group Inc., 448 F. Supp. 3d 352, 373 (S.D.N.Y. 2020).
[5] See SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308 (S.D.N.Y. 2023).
[6] See SEC v. Kik Interactive Inc., 492 F. Supp. 3d 169, 178.
[7] See SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308, 326 (S.D.N.Y. 2023).
[8] See American Leadership in the Digital Finance Revolution, Paul S. Atkins, U.S. Sec. & Exch. Comm’n, July 31, 2025 ( https://www.sec.gov/newsroom/speeches-statements/atkins-digital-finance-revolution-073125)
Written By Nick L. Torres, Esq.
Nick L. Torres, Esq., founder and managing partner of Torres & Zheng at Law, P.C. (T&Z Business Law), specializes in China-related corporate and securities transactions, including venture capital, private equity, M&A, and securities offerings, with expertise in Restaurant Law and China Practice.
