Chapter 4

Securities Law Basics

A security is an investment contract — and many tokens have been treated as securities by regulators, especially in the United States. If your token qualifies, issuers typically need registration or a valid exemption, with disclosure, investor limits, and ongoing obligations. Selling without that path invites enforcement.

U.S. courts use this framework to decide whether an arrangement is an investment contract. Other jurisdictions use different tests, but Howey shapes global token design.

The Howey test — four factors courts weigh

Factor	Question regulators ask
Investment of money	Did participants contribute value — cash, crypto, or work?
Common enterprise	Are profits tied to the issuer's or pool's efforts, not solo effort?
Expectation of profit	Did marketing or tokenomics promise returns or appreciation?
Efforts of others	Do passive holders rely on a team to build, promote, or manage?

Utility language in a whitepaper does not override economic reality. Regulators look at what buyers reasonably expect, not marketing labels.

Enforcement has targeted ICO issuers, staking-as-a-service programs, and tokens sold with profit narratives. Bitcoin and ether have received different treatment in some U.S. statements, but most new token launches still face securities scrutiny. "Not a security" disclaimers are not legal classifications.

Exemptions like Reg D (accredited U.S. investors) or Reg S (offshore offerings) exist but impose strict limits. This chapter explains the concepts so you can recognize securities risk — always consult qualified counsel before issuing or distributing tokens.