Digital & Analogue Partners
9 min readApr 14, 2023

Are you a crypto-enthusiast eager to stay ahead of the curve? This gripping article unpacks the SEC’s stringent regulations on crypto-tokens, including classifying more tokens as securities and its severe consequences for crypto projects. Our expert analysis decodes the complex jargon of token classifications and unpacks the infamous Howey Test, providing valuable guidance for project creators and lawyers. Stay ahead of the changing crypto-asset regulation landscape.

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Previously, we explored the evolution of securities market regulation in the United States and highlighted the crucial role played by the Securities and Exchange Commission (SEC) in shaping the global financial market. This piece will delve deeper into crypto-asset regulation and examine the SEC’s aggressive stance towards crypto products and its impact on the industry.

The SEC’s increasing scrutiny of crypto-assets is evident in the growing number of assets being recognized as securities, such as:

  • Kik Interactive: In June 2019, the SEC charged Canadian messaging app Kik Interactive for conducting an unregistered securities offering through its initial coin offering (ICO) of “Kin” tokens.
  • Telegram: In October 2019, the SEC filed a complaint against Telegram for conducting an unregistered securities offering through its ICO of “Gram” tokens.
  • Blockchain of Things Inc: In December 2019, the SEC charged Blockchain of Things Inc for conducting an unregistered securities offering through its ICO of “BCOT” tokens.
  • BitClave PTE Ltd: In May 2020, the SEC charged BitClave PTE Ltd for conducting an unregistered securities offering through its ICO of “CAT” tokens.
  • Enigma MPC: In February 2021, the SEC settled charges against Enigma MPC for conducting an unregistered securities offering through its ICO of “ENG” tokens.
  • Unikrn Inc: In September 2021, the SEC charged Unikrn Inc for conducting an unregistered securities offering through its ICO of “UnikoinGold” tokens.

If a token is deemed a security, it is subjected to rigorous regulations, which may include substantial fines, registration requirements, or even the destruction of tokens. Such regulations carry significant consequences for the crypto industry, particularly for projects whose tokens are acquired by US citizens.

Our new article demystifies token classifications and their legal implications in the crypto market. We explore the Howey Test’s application to digital assets and guide project creators and lawyers before initiating token sales.

Whether you’re a crypto enthusiast or a project creator, our article delivers invaluable insights to help you stay ahead in the rapidly evolving world of crypto-asset regulation. Take advantage of this informative and essential read!


Before the emergence of blockchain technology, digital assets such as images or documents were vulnerable to unauthorized duplication, as they could be easily copied an infinite number of times by anyone with access to them.

What has changed with the advent of blockchain?

Blockchain technology has addressed this issue by providing a distributed ledger that maintains a permanent and immutable record of all transactions. This ensures that digital assets can only be accessed and modified by authorized individuals, greatly enhancing the security and transparency of these assets.

What are the key benefits of blockchain?

  • Enhanced Security and Transparency: Blockchain’s decentralized nature, advanced cryptography, and immutable record of transactions protect digital assets from unauthorized access and manipulation while providing transparency for auditing and tracing transactions, reducing the risk of fraud.
  • Tokenization and Asset Management: Blockchain enables the creation of tokens representing various types of assets, such as virtual currencies, securities, artwork, and real estate. This allows for secure and efficient digital asset ownership, transfer, and management, expanding possibilities for asset management and investment.
  • Increased Efficiency and Cost Reduction: By eliminating intermediaries and facilitating direct transactions between parties, blockchain reduces transaction costs and increases efficiency. This is particularly beneficial for cross-border transactions, which can be completed faster and more securely.
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Initial Coin Offerings (ICOs) have become a popular way to raise funds for cryptocurrency projects since 2013. The rise of ICOs can be attributed to the success of Vitalik Buterin’s Ethereum project, which popularized the practice. In July 2014, Buterin raised $18.5 million through crowd sales for Ethereum.

“The Ethereum ICO was a groundbreaking moment in the history of blockchain technology, as it demonstrated the power of decentralized crowdfunding and the potential of smart contracts to revolutionize the way we transact and interact online.” — Vitalik Buterin.

Vitalik Buterin

Within weeks of trading in the summer of 2015, Ethereum’s capitalization reached over $80 million, demonstrating its success for investors. The triumph of Ethereum inspired both legitimate startups and fraudulent operators to offer coin sales, leading to a rapid increase in the number of ICOs worldwide.

However, the practices of ICOs have raised concerns among regulators, including the SEC. In 2017, the commission published a clarification on ICOs and their associated risks. The SEC suggested regulating token offerings under the U.S. Securities Act of 1933. The future of token offering regulation remains uncertain as authorities continue adapting and responding to the evolving digital asset landscape.


Tokens can be classified into three types based on their legal status and relation to real-world assets, as defined by the SEC.

  1. Utility Tokens: These tokens are created to provide direct access to a product or platform or offer discounts on future products and services provided by the platform. Examples include BNB (Binance), UNI (Uniswap), and Cake (Pancakeswap), which are tokens used in various cryptocurrency exchanges.
  2. Payment Tokens: These tokens are designed solely to pay for goods and services unrelated to the platform on which they exist. They serve the same purpose as fiat currencies. Examples of payment tokens include Bitcoin, Ethereum, Monero, Litecoin, and others.
  3. Security Tokens (Investment Tokens): These tokens are created to raise funds or invest passively in a project. They are intended to generate a positive return on investment and receive underlying assets or dividends. In economic terms, they are like bonds or stocks. An example of a security token is the SPICE token, offered by the venture capital fund SPICE VC. The fund allowed investors to invest in tokenized securities and receive SPICE tokens as a type of bond in return.


With the SEC’s increased focus on cryptocurrency, digital assets are now subject to securities market regulations, including the Howey Test. This test applies the same four criteria to digital assets as traditional securities, as established in the 1946 Supreme Court case, SEC v. W.J. Howey Co.

The first criterion

The first criterion of the Howey Test is the investment of money or cash investments. This criterion is met when investors contribute financial resources, such as fiat currency or other cryptocurrencies, in exchange for the offered tokens. In the context of ICOs, where developers sell new tokens to investors, the investment typically occurs during issuance. Investors provide funds to the project in the expectation that the tokens will gain value or give access to a platform or service. As a result, the cash investment criterion is generally met for ICOs and other token offerings.

The second criterion

The second criterion of the Howey Test, a monetary investment in a common enterprise, is often considered the most complex and controversial due to the various interpretations of what constitutes a “common enterprise.” This criterion can be divided into horizontal and vertical commonalities, with vertical commonality further subdivided into narrow and broad approaches.

  • Horizontal commonality occurs when investors’ funds are pooled, and each investor’s income depends proportionally on the income of all other investors. This is the most widely accepted interpretation of a common enterprise, as it emphasizes the pooling of funds and the sharing of profits and losses among investors.
  • Vertical commonality links an investor’s success to the success of the promoter or the enterprise. In the narrow vertical approach, a common enterprise exists if there’s a direct correlation between the investor’s income and the enterprise’s success. The broad vertical approach, on the other hand, requires that the investor’s success depends on the project organizer’s personality, experience, or fame. The broad vertical approach is more subjective and harder to apply consistently, so it is often controversial.
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Although no specific case law explicitly defines the broad vertical approach, some cases lean towards a more expansive interpretation. For example, in SEC v. Glenn W. Turner Enterprises, Inc. (1973), the court ruled that a common enterprise existed even though the investors’ returns depended on their efforts to recruit new investors. The court emphasized the promoter’s central role in organizing and managing the scheme, influencing the investors’ success. An excellent example of the narrow vertical approach is SEC v. SG Ltd. (2000) involved a Ponzi scheme called the “Magic Kingdom,” operated by SG Ltd. The company promised investors high returns from trading in international bank instruments. The court found that a common enterprise existed due to the direct correlation between investors’ income and the company’s trading program success. The key difference between the narrow vertical and broad vertical approaches lies in the degree of connection between the investor’s returns and the enterprise or organizer’s performance.

The third criterion

The third criterion is the expectation of profit. If tokens give access to a service or platform, and their economic model (tokenomics) does not involve resale, then meeting this criterion is not straightforward. However, investors’ behavior in the marketplace is monitored to determine their intentions. Many investors purchase tokens solely to generate resale income, which means the fourth criterion often comes into play.

The fourth criterion

The fourth criterion is that the income generated is solely a result of the activities of others. In the case of public blockchain tokens, this criterion may only partially apply since holders rely on the efforts of third parties such as miners or software developers. However, when the resale income is part of a single orchestrated strategy, the transaction can qualify as an income scheme, meeting the fourth criterion, as demonstrated in SEC v. Koscot Interplanetary, Inc. (1974).

In this case, Koscot Interplanetary, Inc., a multi-level marketing (MLM) company, created an investment scheme that relied on participants investing in product inventory for resale and recruiting new investors. The company’s single strategy focused on generating income for participants through the efforts of the company’s management and recruits rather than the individual efforts of the participants themselves.

Applying this concept to token offerings, if a project organizer designs a strategy where token holders’ profits depend primarily on the efforts of the project team, the promoter, or other recruited participants rather than the token holders’ individual efforts, the fourth criterion of the Howey Test may be met. This would subject the token offering to securities regulations as the income generated would be considered a result of the activities of others, like the situation in the Koscot case.

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If a token meets all four criteria of the Howey Test, it will be recognized as a security by the SEC, regardless of how the issuer qualified it before issuance. Under U.S. law, companies cannot sell securities without registering the offering with the SEC or obtaining an exemption from registration.

Non-compliance with the SEC’s requirements can lead to severe consequences, including falling under the SEC’s jurisdiction if a US citizen invests in the project. This may result in multi-million-dollar fines and litigation.

In 2020, the SEC banned the issuance of Gram tokens, recognizing them as securities. The case of Gram tokens, founded by Pavel and Nikolay Durov, illustrates that the classification of tokens as securities is not always evident or straightforward. Nevertheless, the founders were ordered to return $1.2 billion to investors, highlighting the risks of not carefully considering the Howey Test before issuing tokens.

Cryptocurrency projects must adhere to SEC regulations and thoroughly analyze the Howey Test criteria to ensure long-term success. By learning from past mistakes, such as the Gram token issuance, project founders can prioritize compliance and safeguard their ventures from regulatory scrutiny and financial setbacks.

Asya Koval
Yuriy Brisov

This article was written by Asya Koval & Yuriy Brisov of Digital & Analogue Partners. Visit to learn more about our team and services in the dynamic and evolving blockchain, cryptocurrency, and digital asset regulation world.

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