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Crypto Law/Level I · What crypto is in law/1.2 The labels/Lesson 3

Securities: the investment contract

How a 1946 case about orange groves decides when a token sale is a securities offering, and how the SEC redrew that line in 2025 and 2026.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. For holders, crypto that is not stock or securities currently sits outside the §1091 wash-sale rule, so losses can be harvested and the coin rebought at once; H.R. 10357, approved by Ways and Means on 16 September 2026, would change that.
  2. Creators of typical meme coins need no SEC registration under the 27 February 2025 staff statement, saving offering costs; the statement has no legal force, excludes tokens with profit promises, and antifraud and state securities laws still apply.
  3. Projects that must raise money from the public can use Regulation Crowdfunding, up to $5 million in 12 months through a registered portal, or Rule 504 up to $10 million; both cost far less than registration but still require disclosures and carry full antifraud liability.
  4. For larger raises, Rule 506(b) has no cap and only a Form D notice with no SEC filing fee; buyers must be accredited or limited non-accredited, general solicitation is banned, and state notice fees apply, so counsel is usually cheaper than an error.

MaterialsSection 2(a)(1) of the Securities Act of 1933, 15 U.S.C. §77b(a)(1), the definition of “security”SEC v. W.J. Howey Co., 328 U.S. 293 (1946)The SEC fact sheet on its 17 March 2026 interpretation, “Application of the Federal Securities Laws to Certain Types of Crypto Assets”The sale page or announcement for any token you are looking at

Wonder

  1. Why would a coin that is not a share in a company ever be treated like stock?
  2. If a token was once sold as a security, is it a security forever?
  3. Has the SEC’s view of crypto really changed since 2025, and is that change permanent?

Explore

  1. A security is an investment that securities law regulates, mainly through registration, disclosure and anti-fraud rules. The US definition in Section 2(a)(1) of the Securities Act of 1933 lists familiar items such as stock, bonds and notes, and also the “investment contract”. Tokens rarely look like stock, so the usual question is whether a token sale is an investment contract. The answer matters: Section 5 of the Act makes it unlawful to offer or sell a security without an effective registration statement unless an exemption applies (lesson 3.2.6), and sellers face liability for misleading statements.
  2. The test comes from SEC v. W.J. Howey Co., decided by the Supreme Court on 27 May 1946 in an opinion by Justice Murphy. The Howey company sold strips of citrus grove in Lake County, Florida, and encouraged buyers to sign service contracts for cultivating and harvesting the fruit; many buyers lived far away and knew nothing about farming. The Court defined an investment contract as “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,” looking at economic reality rather than form (lessons 3.1.1 to 3.1.4).
  3. The SEC first applied Howey to tokens in its DAO Report of 25 July 2017, concluding that DAO Tokens were securities while choosing not to bring a case. Many enforcement actions followed, which critics called regulation by enforcement (lesson 3.2.1). Courts did not always agree with the SEC. On 13 July 2023, in the Ripple case, Judge Analisa Torres held that Ripple’s sales of XRP to institutions were investment contracts but its automated sales on exchanges were not (lesson 3.1.7). The lasting point is that the analysis looks at each transaction and the promises around it, not only at the token.
  4. The SEC changed course in 2025 (lesson 3.2.2). On 21 January 2025 it launched a Crypto Task Force led by Commissioner Hester Peirce, and on 27 February 2025 it dismissed its case against Coinbase. On 12 November 2025 Chairman Paul Atkins set out a “token taxonomy” and said investment contracts “can be performed and they can expire.” On 17 March 2026 the SEC issued a formal interpretation, joined by the Commodity Futures Trading Commission (CFTC), stating that digital commodities, digital collectibles, digital tools and stablecoins issued under the GENIUS Act are not securities, while tokenized securities remain securities.
  5. The interpretation also explains how a token that is not itself a security can become part of an investment contract: when an issuer induces people to invest money in a common enterprise with promises to carry out essential managerial efforts from which buyers reasonably expect profit. The contract ends when the issuer has kept those promises or failed to keep them. On 18 August 2026 the SEC went further and proposed Regulation Crypto Assets, with offering exemptions of up to $5 million over four years and up to $75 million per 12 months, plus a conditional safe harbor. Comments were due by 20 October 2026; it is a proposal, not a final rule.
  6. An interpretation states the agency’s view; it is not a statute. Since Loper Bright Enterprises v. Raimondo (28 June 2024), courts decide for themselves what a statute means, a later Commission can change course, and state securities regulators apply their own laws. A market-structure bill, the CLARITY Act, passed the House in July 2025 but was not law as of October 2026 (lesson 3.2.5). Anti-fraud rules apply whatever the label. A practical check: on a token’s sale page, list every promise the team makes about building the project, buying back tokens or raising the price, because those promises are what the Howey analysis weighs.

Key facts

  • Section 2(a)(1) of the Securities Act of 1933 includes “investment contract” in the definition of a security.
  • SEC v. W.J. Howey Co., 328 U.S. 293, was decided on 27 May 1946 and concerned citrus groves in Lake County, Florida.
  • Howey defines an investment contract as a contract, transaction or scheme in which a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
  • In its DAO Report of 25 July 2017, the SEC concluded that DAO Tokens were securities.
  • On 17 March 2026 the SEC, joined by the CFTC, issued an interpretation stating that digital commodities, digital collectibles, digital tools and GENIUS Act stablecoins are not securities.
  • On 18 August 2026 the SEC proposed Regulation Crypto Assets, including offering exemptions of up to $5 million over four years and up to $75 million per 12 months.

Exercise nine, six, three, one

9CollectList up to 9 statements from a token’s website, sale page or social posts that describe what the team will do or what buyers can expect, such as building a product, listing on exchanges, buying back tokens or sharing revenue.
6ClusterSort them into 6 categories: promises of profit, promises of managerial work, descriptions of how the token is used, statements about the community, disclaimers, and statements you cannot classify.
3DistillReduce the 6 categories to 3 groups: statements that point toward an investment contract, statements that point away from one, and statements that are neutral or unclear.
1CrystallizeWrite 1 sentence explaining, in your own words, why the promises made when a token is sold can matter more than the token itself.

Fact check

Dates, figures and claims checked against the published sources listed below.

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