SEC Crypto Proposal Wouldn’t Clear Up Howey Ruling’s Uncertainty

The Securities and Exchange Commission’s proposed “Regulation Crypto Assets,” announced on Aug. 18, seeks to create a workable federal framework for crypto offerings. It would establish tailored exemptions, require token-specific disclosures, and provide a mechanism whereby trading in tokens can eventually stop being treated as securities transactions.

The proposal shows the SEC can define the asset class with precision, but it retains the source of uncertainty it aims to clear up. That’s because the proposal builds atop the US Supreme Court’s 1946 opinion in SEC v. W.J. Howey Co., a case involving orange groves and “investment contracts,” the catchall category of securities.

Building a permanent regime for continuously traded fungible assets on investment contracts is a choice Howey’s own facts undercut. To see why, suppose the Howey investment contracts were subjected to Regulation Crypto Assets. What would happen to the oranges?

In Howey, purchasers acquired interests in citrus acreage and entered service contracts under which Howey-in-the-Hills cultivated, harvested, and marketed the fruit. The purchasers sought profits from Howey’s work, not the opportunity to farm their own parcels.