New interpretation of US Howey test gaining ground

The crypto community celebrated a victory in court on Jan. 30 when the United States Securities and Exchange Commission (SEC) admitted in the remedies hearing of the LBRY case that secondary sales of its LBC coin were not securities sales. John Deaton, who represents Ripple in court in the SEC’s case against it, was so excited that he created a video for his Twitter-hosted CryptoLawTV channel that evening.

Deaton, a friend of the court, or amicus curiae, in the case, recounted a conversation he had with the judge that day. “Look, let’s not pretend. Secondary market sales are a problem,” then “I brought up to him that Lewis Cohen article,” Deaton recalled.

Deaton was referring to the paper “The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities” by Lewis Cohen, Gregory Strong, Freeman Lewin and Sarah Chen of the DLx Law firm, which Cohen co-founded. Deaton had praised the paper before, in November 2022, when it was submitted in the Ripple case, in which Cohen is also an amicus curiae.

There is a growing buzz around the paper. It appeared on the preprint repository Social Science Research Network on Dec. 13. When Cointelegraph spoke to Cohen in mid-January, he said the paper was the most downloaded in the website’s securities law category, with 353 downloads after about a month. That number more than doubled in the following two weeks. The paper has also garnered attention in mainstream and legal media and crypto-related podcasts. Its unusual title is a nod to James Joyce’s Ulysses.

The Cohen paper looks closely at one of the timeless adages of crypto securities law: Securities are not oranges. This refers to the Howey test, established by the U.S. Supreme Court in 1946 to identify a security. The paper makes an exhaustive examination of the Howey test and proposes an alternative to how the test is currently applied.

When Howey met Cohen

Not everyone favors applying the Howey test to crypto assets, often arguing the test works better for prosecuting fraud cases than as an aid for registration. Cohen himself agreed with this position in a Feb. 3 podcast. Nonetheless, the paper’s authors do not challenge the use of the Howey test — which arose from a case concerning orange groves — on crypto assets.

A short summary cannot come close to capturing the breadth of the paper’s analyses. The authors discuss SEC policy and cases involving crypto, relevant precedents, the Securities and Exchange Acts and…