For those who didn't know (like me): The Howey Test determines that a transaction represents an investment contract if "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,"
The major issue with Howey has always been that it doesn't account for situations where investors are investing for some benefit other than profit from appreciation or dividends. Howey is particularly difficult to apply when that "other benefit" is personal consumption or when investors are investing for a combination of profit and "other benefit" as is the case with Kin.
For example, what if Mr. Howey had purchased the orange grove expecting to eat 10% of the oranges and leave the remaining 90% subject to the leaseback agreement originally at issue. Is the orange grove agreement still an "investment contract" if Mr. Howey eats 10%? What if he eats 50%? 90%?
What if Mr. Howey planned to sell all of the oranges when the market price was over $X per pound and eat any oranges when the market price was below that amount?
That's the Howey grey area in which Kin is operating. Many people likely purchased small amounts of Kin with the expectation that they might use some of it for in-app purchases and hold some anticipating a profit from it appreciating in value.
Other cases that have been litigated in the wake of Howey that you might find interesting, though not necessarily helpful in applying Howey to cryptocurrency:
- United Housing Foundation v Forman[1] (1975) where "stock" issued by a housing corporation that provided a reduction in rent was _not_ an investment contract (or security at all).
- SEC v Edwards[2] (2004) where a fixed-rate leaseback agreement for payphones _was_ a security.
- SEC v Lauer[3] (1994) where the court was... flexible in their interpretation of the Howey test, finding a "common enterprise" existed where there was only one investor.
The Lauer opinion was particularly important for demonstrating that courts look to the "economic reality of the transaction" when determining whether something is or isn't a security.
100% agree on this assessment and the difficulty of applying securities law. The application of the Howey test is so open for debate that it becomes uncomfortably subjective. See my comment here: https://news.ycombinator.com/item?id=20101984
Even if tokens aren’t a security (and although I understand both sides of the debate it’s my professional opinion that they are) they are most certainly a commodity. So the battle over jurisdiction is really between the SEC and the CFTC, not between the SEC and no oversight at all.
Interestingly, most of the points you raised (financing innovation, alternative to VCs, etc.) would put tokens such as Kin squarely in the “securities” bucket instead of the “commodities” bucket.
Regulation is coming for cryptocurrency and regulation is needed for cryptocurrency. And the industry would be far better served by working with their future regulators to establish reasonable guidelines rather than fighting them in court.
https://www.investopedia.com/terms/h/howey-test.asp