Edward Lee is a Professor of Law at the Santa Clara University School of Law, starting in August 2024. This post is based on his recent article forthcoming in the U.C. Davis Law Review.
The Securities Act of 1933 defines “security” by identifying twenty examples of financial instruments or interests that constitute securities. “Investment contract” is the thirteenth example. It has assumed outsized importance in the Securities and Exchange Commission’s (SEC’s) enforcement actions against entities that have made public offerings of unregistered securities. Yet, nearly a century since the 1933 Act’s passage, the meaning of “investment contract” is still contested.
Nowhere is that more apparent than in the SEC’s ongoing enforcement actions against so-called “crypto asset securities”—a term nowhere in the Securities Act, but one that the SEC has used broadly to describe cryptocurrencies and non-fungible tokens (NFTs) in various actions. According to the SEC, these crypto assets are securities if they are “investment contracts” under the seminal case of SEC v. W.J. Howey Co., in which the Supreme Court interpreted the term in 1946. Under SEC Chair Gary Gensler’s expansive view, most cryptocurrencies are investment contracts. Even an NFT for a Pokémon card might be.
