Are Investment Contracts Securities? | Howey Test Basics

Many investment contracts are treated as securities when buyers risk value and expect gains from a promoter’s work.

Stocks and bonds feel familiar. An “investment contract” can feel slippery. It can show up as a token presale, a pooled rental deal, a revenue split, or a “membership” that pays a monthly cut. The label can change. The legal treatment can stay the same.

If you’re trying to sort out whether a deal is a security in the United States, the cleanest starting point is the Howey test from a U.S. Supreme Court case. The test looks past branding and asks what the deal really does.

This article walks you through the test in plain language, then shows how to apply it to real offers without getting lost in jargon.

What “Security” Means Under U.S. Federal Rules

U.S. federal law uses “security” as a wide bucket. It includes familiar items like stock and notes, plus a catch-all called an investment contract. That catch-all exists because people raise money in all sorts of shapes, not just in classic stock certificates.

When something is treated as a security, sales rules can change. Registration may be required unless an exemption fits. Anti-fraud duties apply. Sales channels, marketing claims, and who can buy may be restricted. Those duties can apply even when the offer is pitched as “points,” “licenses,” “collectibles,” or “memberships.”

Why Labels Don’t Decide The Outcome

Courts look at substance. A deal can be a security even if the paperwork avoids securities language. In the Howey case, the Supreme Court warned against letting form defeat what’s actually being sold. If it functions like passive investing, the securities bucket can apply.

Investment Contracts As Securities In Real Deals

An investment contract is one type of security. Courts usually test it with the Howey standard. You can read the full decision text and a plain explanation of the test on Cornell Law School’s Legal Information Institute pages.

Many summaries describe Howey in three parts. Others break it into four for clarity. This version stays practical and easy to map to deal terms:

• Value is put in. Money is typical, yet other value can count too.
• A shared venture exists. Your result is tied to others or to the promoter’s project.
• Buyers expect gains. The pitch points to appreciation, yield, payouts, revenue share, or resale upside.
• Those gains come from others’ work. Buyers rely on a promoter or third party to produce results.

These parts are fact-driven. That’s why the same “product” can be sold in a way that triggers securities rules in one setting and not in another.

Element 1: Value Is Put In

This part is often straightforward. If buyers pay cash, wire funds, swipe a card, send crypto, or transfer property in return for a promised return, value is at stake. Even deals marketed as “free” can raise questions if buyers still give value through required work, locked funds, or mandatory purchases tied to the offer.

Element 2: A Shared Venture Exists

This asks whether investors rise and fall together, or whether each buyer controls their own outcome. A shared venture can show up when funds are pooled, when payouts depend on the promoter’s overall business results, or when returns track a single pool of assets.

Element 3: Buyers Expect Gains

“Gains” can mean cash distributions, interest-like yield, staking rewards, revenue share, buybacks, or resale profit. Marketing matters a lot here. If the seller talks about price rising, “passive income,” “monthly yield,” or “get in early,” that points toward this element. If the product is mainly for present-day use and the pitch stays on use, that can pull the other way.

Element 4: Gains Come From Others’ Work

This is where many close calls sit. If buyers rely on a manager, operator, developer team, sponsor, or promoter to build, run, market, or maintain the venture, that dependence can satisfy Howey. If buyers must run the business themselves to earn returns, the deal can look less like a security.

For digital assets, the SEC staff published a detailed page and a downloadable PDF that list signals they often weigh when applying Howey to token offers. You can read those staff materials on the SEC site here: SEC staff page on investment contract analysis and SEC staff memo (PDF).

Are Investment Contracts Securities? A Clear Test You Can Apply

You don’t need a law degree to do a first-pass screen. You need to read what’s being promised, who does the work, and what buyers can do on day one.

Start With The Sales Pitch

Ads, landing pages, influencer scripts, chats, webinars, and sales calls can matter. A deal sold as “buy now, sell later for more” reads differently than the same item sold as “buy this to use it right away.” If you’re evaluating a deal, save screenshots and keep copies of emails and posts.

Ask Who Controls The Levers

Try this simple question: if the promoter vanished tomorrow, could buyers still get the expected outcome through their own actions? If the answer is no, reliance on others is likely. If the answer is yes, the “efforts of others” element may be weaker.

Look For Pooling

Pooled funds can be obvious (“all proceeds go to the project”) or subtle (a platform uses all deposits in one pot to generate yield). If payouts depend on a shared pool, the shared-venture element is easier to meet.

Watch For Mixed Messaging

Sellers sometimes claim a token or membership is “for access,” yet also push charts, price targets, buyback plans, or exchange listings. That mix can raise risk. A product can have real use and still be sold as a passive bet on a team’s work.

Here’s a compact checklist you can use to sort facts fast. It’s not legal advice. It’s a way to map the offer to Howey so you can see where the pressure points sit.

Howey Area	What To Look For	Common Proof
Value put in	Buyers give money, crypto, assets, or services for a return	Checkout flow, wallet transfer, invoice, required tasks
Shared venture	Returns tied to pooled funds or the promoter’s project	“Use of proceeds,” pooled yield language, shared payout formula
Expected gains	Pitch centers on appreciation, yield, payouts, resale upside	ROI charts, payout screenshots, “income” claims, price targets
Others’ work	Buyers rely on a manager, team, or operator to create value	Ongoing build promises, marketing commitments, admin control
Manager control	Promoter can change rules that affect supply, payouts, or fees	Unilateral terms updates, mint/burn rights, reserve discretion
Info gap	Buyers can’t verify reserves, operations, or risk controls	No audits, thin reporting, vague disclosures, hidden strategies
Resale push	Marketing steers buyers toward secondary sales	Listing talk, “floor price” hype, buy pressure campaigns
Real use now	Use exists and is used by buyers at purchase time	Working product, active usage metrics, immediate service delivery

Common Deal Patterns That Trigger Investment Contract Risk

Investment contract questions show up far beyond Wall Street. Here are patterns that often create confusion because the deal feels informal or “new.”

Real Estate Bundled With A Required Manager

Buying real estate is not automatically a securities transaction. Still, packaging property with a required management contract, pooled income, and a passive return pitch can move the offer toward investment-contract treatment. Howey itself involved land paired with service contracts that generated returns for buyers.

Revenue Share Deals

A revenue share can look like a security if buyers pay in and rely on the operator to generate revenue. If buyers truly run the business and control operations, the analysis can change. What happens in real life matters.

Startup Fundraising Documents

Early-stage fundraising often uses simple documents like notes or SAFEs. In U.S. practice, these are commonly treated as securities offerings. That means exemption planning, buyer eligibility rules, and truthful disclosure practices can matter even in small rounds.

Digital Assets And Yield Products

Tokens and yield programs can be structured in ways that satisfy Howey, especially when value depends on a small group shipping features, marketing, managing reserves, or running the platform. The SEC staff materials linked earlier are a direct window into how staff often reasons through these fact patterns.

What Changes When A Deal Is Treated As A Security

People ask this question because the classification has real consequences for issuers, platforms, and buyers.

For Issuers And Promoters

• Registration or an exemption. Public offers generally require registration unless an exemption applies.
• Truthful disclosure. Anti-fraud duties apply in securities offers and sales, registered or exempt.
• Marketing limits. Certain exemptions restrict general solicitation or who can purchase.

For Platforms And Middlemen

Platforms that facilitate trades or earn transaction fees can face separate registration duties depending on the activity and what is traded. Even “matching” buyers and sellers can raise exchange or broker issues when the item traded is a security.

For Buyers

Security status can add protections like mandated disclosures and clearer liability rules for misleading statements. It can also bring resale limits in private offerings. Buyers can still lose money, yet the legal structure can offer more paths for recovery when deception is involved.

Scenario	Why It Can Fit Howey	Next Step
Token presale funding a team	Buyers rely on the team’s build and promotion to raise value	Compare marketing claims to SEC staff signals
Pooled “yield” product	Funds pooled; payout depends on manager’s trading or lending	Ask for audited reporting and custody details
Rental unit with required operator	Passive return pitch tied to operator’s work	Separate property value from operator promises
Creator revenue share	Income depends on creator output and brand marketing	Check reporting rights and payout calculation terms
Startup SAFE sold to friends	Capital raise with expectation of equity upside	Verify exemption path and buyer eligibility
“Membership” with monthly payouts	Payout framing resembles yield from operator activity	Ask who can change terms and why payouts exist

Questions To Ask Before You Buy Or Raise Money

These prompts help you spot securities risk early, before time and money get burned.

Questions For Buyers

• What exact benefit do I receive right now, on purchase day?
• What work must I do to earn, and can I realistically do it?
• Who controls the cash, the wallet, or the underlying assets?
• What disclosures exist: financials, audits, risk factors, governance?
• Can the promoter change supply, payouts, fees, or redemption rules?
• What is the real plan for liquidity: resale venue, lockups, transfer limits?

Questions For Issuers

• Are we raising capital with expected gains tied to our work?
• Is marketing heavy on price talk and light on present-day use?
• Do we have a clear registration or exemption path for U.S. offers?
• Can we document what buyers can do without our ongoing actions?
• Do we have review steps to keep public statements accurate?

Primary Sources Worth Reading

If you want the law in its own words, start with these sources and read them slowly. They’re the base layer behind most Howey analysis:

• Supreme Court text for SEC v. W.J. Howey Co.
• Cornell LII summary of the Howey test
• SEC staff page on investment contract analysis
• SEC staff memo (PDF)

What To Do If You’re Unsure

If the deal feels like “I pay now, you do the work, I profit later,” treat that as a warning sign. Slow down. Save the marketing materials. Read the terms. Track who controls funds and who can change the rules.

Howey is flexible and fact-based. That cuts both ways. It can protect buyers when a scheme is dressed up with new labels. It can also surprise issuers who thought they were selling a simple product. Getting the facts on paper early is the best way to avoid a costly mess later.