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Crypto Law/Level III · Tokens and securities law/3.1 The Howey test/Lesson 2

An investment of money

What counts as ‘money’ under the first Howey element, why paying in crypto or services can count, and why free airdrops and paid-in-tokens staff fall outside it.

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. Zero-cost route: airdropping a non-security token to recipients who give the issuer no money, goods, services or other consideration is no investment of money under SEC Release 33-11412 (effective 23 March 2026); the catch: no post-announcement purchase or task may be required.
  2. Reward only activity that happened before any airdrop was announced, with nothing further required; general talk about a possible airdrop is allowed only if it gives no terms. Recipients still report the tokens as income at fair market value when received (lesson 2.2.3).
  3. Paying staff or contractors in tokens failed the first Howey element in SEC v. Ripple Labs (S.D.N.Y. 2023), because recipients paid nothing; the catch is a footnote risk that resales can still be securities transactions, and the payments are taxable wages or self-employment income.
  4. Paying in ether or bitcoin is not an escape: the DAO Report and SEC v. Shavers treat crypto as money. For any paid channel, keep a dated record of what each recipient gave; that record is what a regulator or court examines first.

MaterialsInternational Brotherhood of Teamsters v. Daniel, 439 U.S. 551 (1979), on what an investor must give upSEC Release No. 33-11412 (March 17, 2026), section VII on airdropsThe July 13, 2023 SEC v. Ripple Labs opinion, part on ‘Other Distributions’A list of every way a token you know left its issuer’s treasury: sales, grants, rewards, airdrops

Wonder

  1. If I paid in ether rather than dollars, did I ‘invest money’?
  2. Is a free airdrop an investment of money?
  3. Are tokens paid to staff or developers sold to them as an investment?

Explore

  1. The first Howey element (lesson 3.1.1) asks whether a person ‘invests his money’. The Supreme Court explained the core idea in International Brotherhood of Teamsters v. Daniel, decided January 16, 1979: in every case finding an investment contract, ‘the purchaser gave up some tangible and definable consideration in return for an interest that had substantially the characteristics of a security.’ Consideration means something of value given in exchange. In Daniel, a compulsory pension plan that employees paid nothing into was held not to be a security under the Securities Act or the Securities Exchange Act.
  2. Money does not have to be cash. The Tenth Circuit said in Uselton v. Commercial Lovelace Motor Freight (1991) that the investment ‘may take the form of goods and services, or some other exchange of value’. In SEC v. Shavers, a federal court in the Eastern District of Texas held that an investment of bitcoin meets the first element. The SEC relied on both cases in its 2017 DAO Report (lesson 3.1.5) to conclude that buyers who paid ether for DAO Tokens had invested money. Paying with another crypto asset is therefore not an escape route.
  3. Giving tokens away for work is different. In SEC v. Ripple Labs, the court on July 13, 2023 looked at XRP that Ripple distributed to employees and to companies as payment, for which Ripple recorded about $609 million in ‘consideration other than cash’. The court held these ‘Other Distributions’ failed the first element: the recipients did not pay Ripple money or other tangible consideration; Ripple paid them. The SEC’s fallback theory, that recipients would resell into the market, was not developed, and the court declined to make that finding. Ripple’s direct sales for cash did involve money (lesson 3.1.7).
  4. Airdrops are free distributions of tokens to chosen wallets. In 2019 SEC staff published a ‘Framework’ saying an airdrop may constitute a sale or distribution of securities. That Framework is now marked withdrawn and superseded by the Commission’s interpretation of March 17, 2026 (Release No. 33-11412, effective March 23, 2026). The interpretation says that airdrops of non-security crypto assets to recipients who give the issuer no money, goods, services or other consideration in exchange do not involve an investment of money, so no registration or exemption is needed for those airdrops.
  5. The fine print matters. The interpretation does not cover airdrops where the recipient performs a service for the tokens, or must buy a crypto asset, buy a product or complete a task after the airdrop is announced. Activity that happened before any announcement, with nothing further required, is not treated as payment for the tokens, and general talk about a possible airdrop is allowed if it gives no terms. A footnote warns that a later resale can still be a securities transaction if the token is tied to an investment contract created elsewhere. Tax treatment is separate (lesson 2.2.3).
  6. Two cautions. First, the 2026 interpretation is the SEC’s view; courts are not bound by it, and the Commission invited comment and said it may revise it. Second, failing the first element ends the Howey analysis, because the test is conjunctive, but only for that distribution: the same token can be sold elsewhere for money. A practical check: list every channel through which a project’s tokens reached holders and, for each, write what, if anything, the recipient gave the issuer in exchange and when. That record is what a regulator or court would examine first.

Key facts

  • In International Brotherhood of Teamsters v. Daniel (1979) the Supreme Court held that a noncontributory, compulsory pension plan is not a security.
  • Uselton v. Commercial Lovelace Motor Freight (10th Cir. 1991) held that an investment may take the form of goods and services or some other exchange of value.
  • The SEC’s DAO Report treated ether paid for DAO Tokens as an investment of money, citing SEC v. Shavers on bitcoin.
  • In SEC v. Ripple Labs (S.D.N.Y. July 13, 2023) the court held that XRP distributed as payment to employees and companies did not involve an investment of money.
  • SEC Release No. 33-11412, issued March 17, 2026 and effective March 23, 2026, superseded the staff’s 2019 digital-asset Framework.
  • The 2026 SEC interpretation says airdrops for which recipients give the issuer no money, goods, services or other consideration do not meet Howey’s investment-of-money element.

Exercise nine, six, three, one

9CollectList up to 9 ways tokens from one project reached holders, such as a presale, public sale, exchange sale, team grant, contractor payment, airdrop or task reward.
6ClusterSort them into 6 groups: paid in cash, paid in crypto, paid in services, paid in tasks after an announcement, received with nothing given, and unclear.
3DistillReduce the 6 groups to 3: clearly an investment of money, clearly not, and needing a closer look at timing and conditions.
1CrystallizeWrite 1 sentence explaining why paying for a token with another crypto asset can still be an investment of money under Howey.

Fact check

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

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