Ava Labs Counsel: You’re Doing the Howey Test Wrong

The Howey Test applies to arrangements, not tokens, Ava Labs’ general counsel said

article-image

SEC Chair Gary Gensler | Source: Third Way Think Tank "Gary Gensler" (CC license)

share

Regulators and industry members need to stop applying the Howey Test to the token and start looking at the arrangement, Lee Schneider, general counsel at Ava Labs, told Blockworks at the Avalanche Summit in Barcelona Wednesday.

“When it comes to classifying individual tokens, it’s really what is the nature of the thing,” said Scheider, who was a partner at McDermott, Will & Emery before joining Ava Labs in 2021.

Anything can be tokenized, but not all tokens are the same, he added, pointing to stablecoins, tokenized assets like NFTs, and collectibles and tokens tied to blockchains, like bitcoin (BTC) and ether (ETH).  

“​​Everybody applies the Howey [test] and they apply it to the token,” Schneider said. “Howey is not about things. It’s about arrangements.”

It’s not about what the token is, Schneider added, it’s about what’s in it. 

“For reasons I have never understood, no one recognizes that the Supreme Court confirmed Howey in 2004 in an opinion bearing the name SEC v. Edwards,” Schneider wrote in a July 2022 paper about Solana’s SOL token. “Once again, the Court recognized the need to scrutinize the arrangement to determine whether it was an investment contract, rather than the assets, items, or things that are the subject of the arrangement.” 

The token classification question has taken center stage recently. 

SEC Chair Gary Gensler notably could not provide a “yes or no” answer to whether or not ether is a security at recent Congressional hearing, frustrating many lawmakers and industry players. 

“I think what Gary Gensler was trying to say, and I don’t think he said it as artfully as he could have, was to look at some facts and circumstances determination,” Schneider said. 

Gensler’s “facts and circumstances” approach to token classification makes navigating the space difficult and confusing though, he added. 

“I understand why the chair says what he says, but I think it makes it very difficult for anybody to decide whether a particular token is a security, and I think that difficulty is compounded by the misapplication of the Howey Test, where you’re applying it to the asset or the item and not to the arrangement,” 

The SEC is potentially nearing the end of its legal battle with Ripple over its XRP token, which has been ongoing for roughly 32 months. A summary judgment is expected by the end of this year, Ripple’s counsel said. For Ava Labs, which issues its own native token, AVAX, it’s a case to keep an eye on. 

Read more: No Matter What Happens With the SEC, Ripple Has Already Won

“We think that the SEC is maybe not understanding fully when something is a security,” Schneider said, adding that he does not “know all of the individual facts” about Ripple’s case. 

“If the court sides with the SEC and says that Ripple is a security, then we’ll spend time looking at Ripple versus AVAX,” Schneider said. “We’ll decide on the AVAX facts and circumstances whether we think it makes a difference.”


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Top Icon.png

Research

Osmosis thrived in H2 2023 on the back of increased DeFi activity deriving from recently launched Cosmos-related projects and better market conditions. With new value accrual mechanisms for the native token, Osmosis is well-positioned to continue its strong performance in 2024.

/

article-image

Though the opposing flow trend is likely to slow over time, industry watchers note, bitcoin fund assets could one day eclipse the $90 billion gold ETF space

article-image

Celestia had the first mover advantage. EigenDA has staked ether. What sets Avail apart?

article-image

Bitcoin moved 1% higher Monday morning in New York, Matrixport analysts say $62,000 could happen next month

article-image

It’s hard to believe right now that crypto — even with all of its flexibility and massive capabilities — could ever be like cash on the internet

article-image

Michael Saylor announced Monday morning that MicroStrategy bought 3k more bitcoin after the X account was compromised over the weekend

article-image

Plus, Pudgy Penguins grows its brand and a group of Autoglyphs sell for $14.5 million