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Freedom from regulatory authorities was one of the founding pillars of cryptocurrencies, right from the very first initiatives such as DigiCash. Bitcoin was the first project to achieve undisputable consensus based on mathematics and computing power. Unlike other countries, the US was one of the first nations to take strong regulatory steps against cryptocurrencies and introuced the Howey Test.

Jay Claton, the Chairman of the U.S. Securities and Exchange Commission (SEC), said on CNBC that the SEC doesn’t consider Bitcoin as security. However, most of the ICOs in the market are securities, and their sale must comply with the existing laws. He further said that the SEC has already cleared its stand on the ICO space, and if people are raising money with the ICO model, they can either do it through private placements or by registering with the agency.

Howey Test: Litmus Test for Securities

As per the guidelines from the SEC, any crypto-asset that satisfies the conditions set by the Howey Test is classified as a security.
Howey test is a set of guidelines put forward by the U.S. Supreme Court in the historical case of SEC v. Howey Co., 328 U.S. 293 (1946).

According to Howey Test:
“an investment contract (undefined by the Act) means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.”

To put it in context with cryptocurrencies or ICOs, if a coin set forward as a utility token promises gains in the capital investment of the investor without requiring any efforts/work from the investor or relies on third-party efforts only, it is not a utility but security token. It is important to consider that most of the ICOs launching utility tokens do not possess a functional platform where these tokens can be used, putting them directly under the SEC’s lens.

SEC Shutting Down ICOs

Munchee, a restaurant meal review app, was one of the first ICOs to be shut down by the SEC. The SEC order indicates that “the company and other promoters emphasised that investors could expect that efforts by the company and others would lead to an increase in the value of the tokens,” effectively falling under the definition of securities. Munchee had to refund any investments made by the investors after the order.
Munchee was one of the first shut down by the SEC, and the agency went on taking stern actions against many ICOs. Blockvest ICO is another example of the SEC’s outreach and due diligence which allowed it to shut down the fraudulent fundraising event.


As the regulatory environment tightens around the world, startups are moving towards security token offerings that allow them to raise funds within the country, from accredited investors only, or to prove their exemption under different SEC’s guidelines including the Howey Test. It is expected that the SEC might come up with some additional instructions for STOs in the coming days.