There have been many cases of cryptocurrencies and tokens having to say that "our product is not an investment." This may seem to be a blatantly untrue statement from these developers, but it is not quite what it seems. There is an organization in the United States of America called the U.S. Securities and Exchange Commission, or SEC for short, that is designed to oversee what are called securities, also known as investments. This is where many people get confused and cause many rants about this confusion. I wish to help clear it up.

According to this article from seclaw.com, a security is, as defined in Section 3(a)(10) of the Securities Exchange Act of 1934:

“'any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.'”

Now that is a lot of convoluted and verbose judicial language! Luckily, the same article simplifies it in the clarification below, which is the basis for what is known as the Howey test:

“'an investment of money in a common enterprise with profits to come solely from the efforts of others; and, if that test be satisfied, it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.'” SEC v. Howey Co., 328 U.S. 293 (1946)

Still a bit complicated, but significantly easier to explain! If a given investor buys a product specifically designed to increase in value due entirely to other investors buying the same product, then it is a security under the SEC definition. However, there are a few exceptions to this rule, and one of those exceptions is currency. Obviously, crypto didn't exist when the original legislation was enacted, but it appears that crypto could fall under the "currency" exception to the rule, unless specifically designated as a security, such as certain tokens. Two crypto tokens I have talked about, the Basic Attention Token and the Gala token, are technically utility tokens, as distinct from security tokens. Utility tokens were designed to be utilized in their respective associated services, as opposed to investing. However, this does not mean that they cannot appreciate in value.

Here is where I remove the confusion. The ordinary person does not use the convoluted SEC definition of "security/investment" when thinking about how to make money from purchasing a product. Rather, they use a broader and much more understandable definition: an investment is a product or set thereof purchased with the intent of selling it later for a profit. This can be seen as the common and true definition of "investment," as distinguished from the legal SEC definition. Under the SEC, a house or an old car is not an investment. Neither is specifically designed to appreciate in value due entirely to other investors. However, the person with the house or old car can buy it, renovate it, and sell it later for a profit with the intent of doing so, thus making it an investment under the true common definition. The same applies to utility tokens and NFT's. Though they may not be specifically designed to go up in value entirely due to other investors, they can appreciate, and some people, myself included, purchase them with the intent to sell them later for a profit.

The SEC and other U.S. Government agencies can use some confusing language. This confusion often passes down to the everyday person, in this case, investing. The SEC uses a stricter and more confusing definition of a security than the common true definition. Although a given product might not be specifically for investing, that does not mean it can't be used for that purpose at all.

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