A critical component of the Howey Test, used to determine if an asset qualifies as a security, specifically requiring that any profit derived from an investment comes substantially from the managerial or entrepreneurial activities of third parties. In the crypto market, this concept is central to the classification of tokens as securities versus commodities or currencies.
Mechanism
This criterion evaluates whether investors retain significant control over their investment’s profitability or if they rely predominantly on the expertise and work of a central development team, foundation, or other active participants. For decentralized projects, the degree of decentralization and investor participation in governance directly impacts this assessment.
Methodology
Legal analysis focuses on the degree of investor reliance on active management by others for the value appreciation of a digital asset. This involves examining whitepapers, marketing materials, and the actual operational structure of a crypto project to determine if passive investors anticipate returns from the issuer’s or a third party’s continuing efforts, rather than from their own actions or broader market forces.
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