Before a founder takes a first dollar, writes a first pitch deck, or promises a first return, there is a prior question that decides which laws apply, which filings are required, and which regulator — in the United States, the Securities and Exchange Commission (SEC) — will be reading the paperwork: is what you are offering a security?
The label does not decide
Founders often start with the name they have given an arrangement. It is a membership. It is a loan from friends. It is a token, a point, a credit, a revenue share, a pre-sale.
Under U.S. federal law, the name is the least important part.
The Securities Act of 1933 defines “security” with a long list — stocks, bonds, notes and other familiar instruments — and it includes in that list the open-ended term “investment contract.” Congress left that term flexible on purpose, so the definition could reach new schemes that had not been invented when the law was written.
That flexibility is not a loophole for issuers. It is a warning to them: regulators and courts look at the economic reality of an arrangement — what was offered, what was promised, and why a buyer parted with money — not at what the arrangement was called in a slide deck.
If the answer is that it is a security, the consequences follow automatically. Offers and sales generally must be registered with the SEC or fit a specific exemption, disclosure obligations apply, and the anti-fraud rules apply in either case. There is no intermediate category for “we are small,” “we know everyone involved,” or “we have not launched yet.”
The test from an orange grove
The governing test still comes from a 1946 U.S. Supreme Court decision, SEC v. W. J. Howey Co. The case did not involve a stock exchange or a new technology. It involved plots of Florida citrus grove sold together with service contracts to cultivate, harvest and market the fruit, with buyers sharing in the net profits.
The Court held that arrangement was an investment contract — and therefore a security.
In the SEC’s own summary of the test, in its Framework for “Investment Contract” Analysis of Digital Assets, an investment contract exists when there is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
Unpacked, founders should ask four questions:
- Is money — or something else of value — being invested? Courts and the SEC read this broadly. Cash qualifies, and so can other consideration, including another digital asset. If someone parts with value and takes on financial risk, this element will usually be present.
- Is there a common enterprise? The investors’ fortunes are tied together, or tied to the promoter’s fortunes — for example through pooled funds or a shared return that rises and falls with the same project.
- Is there a reasonable expectation of profits? Profits here can mean capital appreciation, a share of earnings, or another financial return. How an offer is marketed matters: if buyers are led, by words or by context, to expect a return, this element points toward a security.
- Would those profits come from the efforts of others? If the return depends primarily on the managerial or entrepreneurial work of a founder, a team or another promoter — building the product, running the business, creating a market — rather than on the buyer’s own efforts, this element is likely present.
When all of these are present, an arrangement is an investment contract under Howey, whatever its label. If one element is genuinely absent, it may not be an investment contract — but that does not end the inquiry, because the same arrangement could still be a security under another part of the definition, such as a stock or a note.
Why this matters for ordinary raises
This is not only a question for token projects or large public companies. It is the question underneath the most ordinary founder decisions.
A founder who takes money from acquaintances on the promise that the business will pay them back with a share of future profits is not describing a favour between friends. Described that way, the arrangement walks through each Howey element: value invested, in a shared business, expecting profits, from the founder’s efforts. That is why the “friends and family” description, on its own, is not an exemption — relationship is not one of the four questions.
The same discipline applies to newer forms. A token does not escape securities law because it runs on a blockchain, and a share does not escape it because it is recorded on one. The SEC’s digital-asset framework makes the same point the orange-grove case made eighty years ago: the analysis follows the offer, the promises made to purchasers, and the circumstances of the sale — not only the form of the instrument itself.
None of this means every raise is prohibited. It means the sequence matters. The lawful path is to answer the security question first, with counsel, and then choose the route that fits the answer — a registration, or a specific exemption such as Regulation Crowdfunding, Regulation A or a private-placement exemption, each with its own conditions, filings and limits — before any money is solicited or accepted.
A practical habit for founders
Before any fundraising conversation, write down, in plain sentences, the answers to the four Howey questions for what you actually intend to offer. Write down what you will say to investors, because marketing language that promises returns can change the analysis. And keep that page. If counsel later advises that the offering is not a security, or that a particular exemption fits, you will have the factual record that advice was based on. If your plans change — a new promise, a new buyer group, a new return structure — ask the question again.
This article is education, not legal advice, and a Howey analysis always turns on specific facts and circumstances. Founders should take their own facts to qualified securities counsel in every jurisdiction where they will offer — in Canada, that includes provincial regulators such as Quebec’s Autorité des marchés financiers (AMF) and the Ontario Securities Commission, alongside U.S. federal law where U.S. investors are involved.
Asking “what is a security, really?” first will not make a raise faster. It will make it a raise that can last — disclosed, structured and defensible when a regulator, a bank or a future investor asks the same question later.
Jean-Francois Amyot is an independent journalist and author of The Art of War Remastered.
