As previously discussed, US Federal Courts give regulators considerable latitude in determining what is and what is not a security.¹

In the interest of not repeating previous material, I am going to run the Ethereum crowdsale through the Howey Test to exemplify why it can most likely be classified as the sale of unregistered securities.

1. Was there an investment of money made on behalf of Ethereum crowdsale participants?

Yes. As I have stated elsewhere, any consideration that has value is likely to be classified as “money” for a Howey analysis.  The Ethereum crowdsale required participants to send their bitcoin to the “secure sale website [] and cold wallet system” designed by the Ethereum Foundation wherein participants initially received 2000 ETH per BTC for the first 14 days and 1337 ETH per BTC for the remainder of the crowdsale.² When the Ethereum crowdsale took place, Bitcoins had a non-zero value, and therefore, this is likely to satisfy the investment of money prong of Howey.

2. Was there a common enterprise?

Yes, there was a common enterprise irrespective of the type of commonality test used.³ The Ethereum Foundation pooled all of the Bitcoins that they received over the course of the 42 day crowdsale wherein they promised crowdsale participants that they would use the proceeds of the crowdsale to, among other things, “[b]uild unstoppable applications” and a “decentralized platform that runs smart contracts”.⁴

This pooling of investor funds is hallmark of horizontal commonality.  Even though this is already sufficient to make a case for common enterprise, there is also a strong case to be made for the presence of vertical commonality (both broad and narrow).⁵  The commonality prong of Howey is likely satisfied.

3. Did participants in the Ethereum crowdsale expect to make a profit?

Yes, they/you/we did. Let’s talk about this.  

The bitcoins that the Ethereum Foundation collected over the course of their 42 day crowdsale were not donations. Initial investors in the Ethereum crowdsale were speculating that the Ether tokens they received in exchange for their bitcoin would appreciate in value over time.⁶

This expectation goes directly against what the Ethereum Foundation affirmed on its blog:

“Ether is a product, NOT a security or investment offering. Ether is simply a token useful for paying transaction fees or building or purchasing decentralized application services on the Ethereum platform; it does not give you voting rights over anything, and we make no guarantees of its future value.”⁷

Let’s unpack this.

Firstly, disclaiming that your offering is not a security doesn’t legally make it so.⁸ Courts will always disregard the form of a transaction and instead focus on the economic reality of a transaction.

Secondly, the “expectation of profits” does not have to take the form of a pro rata sharing of dividends or voting rights or what would be considered a “normal” return on an investment; Howey profits are not narrowly defined and can come in the form of simple capital appreciation.⁹

What is capital appreciation you ask? Investopedia defines “capital appreciation” as “rise in the value of an asset based on a rise in market price. It occurs when the asset invested commands a higher price in the market than an investor originally paid for the asset.”¹⁰

So, uh, something that looks like this?


All investors expected something in return for their bitcoins—namely, Ether.  I think it is well understood by all involved that, despite the lack of guarantees about the future value of Ether, crowdsale participants forked over their bitcoin because they believed that one-day the sum of their Ether tokens would be worth more than the sum of their initial bitcoin investment.

As it turns out, that is exactly what has happened. Or do any ether token holders out there want to exchange 1 bitcoin for 2000 ETH.?

Suffice it say, a court would be likely to find that the expectation prong of Howey is satisfied.

4. Did token holders rely on the efforts of others for their (expected) profits?

Yes. The touchstone of this prong is whether an investment in a common venture is “premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”¹¹

The value the Ethereum Network was only ever going to be as good as the ĐΞV PLAN)(sic) and the work completed by the Ethereum Foundation’s developers.  Keep in mind that the Ethereum network as we know it today did not exist before the crowdsale.  The capital appreciation of Ethereum tokens was heavily dependent on the development efforts made by the paid members of the Ethereum Foundation.

Their success is evidenced in a ~$1 billion market cap, despite their initial market raise of roughly $18 million dollars worth of bitcoin.  A strong case could be made that this surge in value would never have happened were it not for the Ethereum Foundation’s extensive and brilliant development efforts that created the Ethereum Ecosystem we recognize today.  

Thus, the Foundation’s work in building up Ethereum is likely sufficient to satisfy the fourth prong of Howey’s investment contract analysis.   

Conclusion: Ether Tokens are very likely to be considered investment contracts in the future and therefore securities under the 33’ Act. 

Up Next: Could the Ethereum crowdsale have qualified for for a registration exemption under Reg S?


[1]  See Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990) (“Congress painted with a broad brush. It recognized the virtually limitless scope of human ingenuity, especially in the creation of ‘countless and variable schemes devised by those who seek the use of the money of others on the promise of profits,’ and determined that the best way to achieve its goal of protecting investors was to define the term ‘security’ in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security.’”).

[2]  See “Launching the Ether Sale” (July 22, 2014) (

[3]  Some circuits use horizontal commonality, which is a pooling of investor contributions, and, according to some courts, a pro rata sharing of profits.

Other circuits use vertical commonality, which has two versions–narrow vertical and broad-verticle commonality.There is a well acknowledged Federal Circuit split over what types of vertical commonality are sufficient find that a particular instrument is a security.  The first is the “narrow vertical” approach wherein the test is satisfied if the risk and profit motives of the promoter and investor are aligned.  See SEC v. Eurobond Exchange, Ltd., 13 F.3d 1334, 1339 (9th Cir., 1994).  The second being the “broad vertical” approach wherein a common enterprise is one in which “ the success of an investor depends on a promoter’s expertise” and requires only that “investors are dependent upon the expertise or efforts of [the] promoter for their returns”  SEC v. ETS Payphones, Inc., 300 F.3d 1281, 1284 (11th Cir., 2002).

[4]  See supra at Note 2

[5]  Broad vertical commonality requires that investors’ fortunes depend on the efforts made by management, while narrow vertical commonality requires that the investors’ profits rise and fall with the profit of management. Are both kinds of vertical commonality present here? Yes they are. First, the Ethereum Foundation clearly promoted the Ether crowdsale formally through the site and informally through blog posts made through forums such as reddit. Second, the Foundation still has significant control over the Ethereum ecosystem, despite a significant number of devs unaffiliated with the Foundation hacking on Ethereum. The Ethereum Foundation, its agents, and the developers working for the Foundation were not one and the same with the investors of the crowdsale. Thus, the work done by the Foundation and its agents is likely to satisfy either broad vertical or narrow vertical commonality and satisfy the commonality prong of Howey.  

[6]  For a great condominium related citation See Wooldridge Homes v. Bronze Tree, Inc., 558 F. Supp. 1085, 1085-86, 1088 (D. Colo. 1983) (purchase of condominium in preconstruction stage satisfied Howey test because management contract bound purchaser, and because purchaser expected capital appreciation from efforts of developer

[7]  See supra at Note 2

[8]  Stephen J. Choi & Andrew T. Guzman, National Laws, International Money: Regulation in a Global Capital Market, 65 FORDHAM L. REV. 1855, 210-212(1997) (indicating that issuer’s intent is of no concern and that an issuer cannot disclaim that its offering is not a “security” to avoid registration).

[9]  SEC v. ETS Payphones, Inc., 300 F.3d 1281, 1282 (11th Cir. 2002); SEC v. Edwards, 540 U.S. 389 (2004)(both noting that an investment contract offering capital appreciation is sufficient for the “expectation of profit” prong of a Howey analysis).  

[10]  See

[11]  See United Housing Foundation, Inc. v. Forman,421 U.S. 837, at 852 (1975).

4 thoughts on “What Nobody Wants to Hear: The Sale of Ether Tokens was Likely A Sale of Securities”

  1. super small not important detail that is wrong:
    “2000 ETH per BTC for the first 14 days and 1337 ETH per BTC for the remainder of the crowdsale.”
    After 14days the rate stared to drop over a period of another 14 days until it eventually reached 1337.

  2. Chris,

    This is a nicely written article but I’m afraid involves slights of hand repeated by many securities lawyers in my view eager to argue crypto falls into their area of business – notwithstanding that such agitations might succeed in rousing the SEC into action and that crypto entrepreneurs should consider Reg S even though there should be no need for it!!!

    Let’s discuss what the slights of hand are. Firstly, let me be clear I’m talking about the bootstrapping of networks (protocol instances) by (i) creating a not-for-profit foundation to promote a decentralized protocol described in a paper, which must necessarily mediate participation using tokens such as ETH (ii) accepting donations for the foundation and reusing them for the purpose of promoting the protocol, including by developing software that enables its use, and (iii) finally *recommending* the community launch a network/protocol instance including some genesis allocation of the participation tokens. A protocol means something akin to morse code that is run between client computers. There are no controlling servers.

    You regularly talk about securities issuers, and here you see the Ethereum Foundation in that role. But notice that it is not within the power of a foundation to issue anything at all. It can *recommend* that some community starts a network instance from some genesis block, which includes initial allocation of participation tokens, and that’s all. The community – or some community – can use the protocol and supporting software to create any damn network they like (and they do!). A large and geographically diverse community of miners adopted the Ethereum Foundation’s recommendation for a genesis block and bootstrapped a decentralized network instance from it thus creating the participation tokens (“ether”) at that moment. They did not exist before and were created by an independent community choosing to adopt a recommendation. This is manifestly different to the Ethereum Foundation “issuing” securities. Please can you show me case law where securities have been issued by “recommendation”.

    You like to talk about Ether tokens as securities. But that implies that there is a common enterprise profiting from them, or that they grant some kind of legal right. This is manifestly not the case. A stateful decentralized protocol run between client computers over the Internet does not grant or involve legals rights. You choose to talk the protocol. It is a sequence of communication steps. No guarantees that the protocol instance will persist are given, and if it vanishes, any tokens you have, which are simply facets of a running network/protocol instance, will disappear completely. A foundation cannot issue tokens, nullify tokens, provide rewards to token holders or anything else. The network is independent on the foundation and a manifestation of some community – as demonstrated by the recent ETC split. The tokens exist purely by merit of the protocol and no individual, organization or cartel is behind them. Please can you show me case law where securities involve no legally defined financial interests, and have no backing organization.

    Thank you.
    Best, Dominic

  3. Chris,

    In my view the important point is the “expectation of profit”. I agree that backers might expect a profit on the secondary market by selling the tokens. However, this does not imply that they expect a profit from “a common enterprise”! The secondary market is a completley different story!

    Hence, the backers are donating BTC to the foundation. These funds will be used according to the purpose of the foundation, i.e. to develop an open-source decentralized network protocol. That’s it! Any other transactions on the protocol, including the creation of a token, is another set of facts and does not mean that there is any profit particpation between the foundation and the backers.

    Therefore: Clearly not securities. Whether such tokens are traded on the secondary market is not relevant for the initial qualification.


    1. Hi Thomas,

      Thanks for checking out my work. I think robust conversation is a great thing for the space and I appreciate you taking the time to create a discussion. I therefore wanted to respond to your comment with a few remarks of my own.

      Firstly, your interpretation of the “expectation of profit” prong of Howey is faulty. The scope of “expectation of profit” is much broader and more nuanced than what you describe as a kind of “profit participation[sic] between the founders and the backers.”

      It’s really a stretch to believe that the investors in the Ethereum crowdsale were forking over their bitcoin simply as a “donation”. Ethereum investors sent their bitcoin, which had a non-$0 value, to a wallet that was “controlled” by the Ethereum Foundation (EF). What investors were expecting to receive in return for this exchanged bitcoin, in addition to the Ethereum Network/OSS, was a new software access token—Ether.

      In your comment, you actually appear to concede “that backers might expect a profit on the secondary market by selling the [Ether] tokens.” But that’s a whole other enchilada.

      The material point is this—what we observe in the case of the Ethereum Presale is an exchange of promises for consideration and therefore, an enforceable contract. As I reference above, the EF made the offer to build the Ethereum Network/Protocol in return for btc. Investors accepted the EF’s offer by sending btc to the EF in return for, among other things, open source software financed and coordinated by the EF as well as the receipt of an amount of Ethereum tokens proportionate to their initial investment.

      If the EF had breached this agreement by 1) failing to “issue” Ether in the previously agreed upon manner put forth for consideration in the Ethereum Crowdsale plan; or 2) by failing to build the Ethereum Network and OSS—effectively embezzling investors’ bitcoin—do you really believe that investors would have just sat on their hands? Of course not. There would have been a massive public outcry and, quite probably, legal action taken in the form of multiple private or class action suits mounted against the EF.

      And, justifiably so! Because Ethereum Presale investors entered into an enforceable contract for both tokens and Ethereum OSS, it’s hard to believe that any court would consider the crowdfunded bitcoins as philanthropic donations to the EF.

      Secondly, your interpretation of the term “sharing of profits” under Howey is extremely reductive. The sharing of profits by an enterprise with its investors (in the form of dividends for instance) is not the paradigm of the Howey “expectation of profit” clause. For example, US federal courts have held that, if investors hoped that their assets would appreciate in value over time, then the expectation of profit prong of a Howey investment contract analysis has been met. See SEC v. Edwards, 540 U.S. 389 (2004); SEC v. ETS Payphones, Inc., 300 F.3d 1281, 1282 (11th Cir. 2002)(both noting that an investment contract offering capital appreciation is sufficient for the “expectation of profit” prong of a Howey analysis).

      One simply has to scour r/EthTrader to find investors thoroughly discussing, in no uncertain terms, their profit motive (and expectations) in participating in the Ethereum Presale. Investors hoped that the value of Ether would exceed their initial investment of btc, and this effectively meets the expectation of profit prong of Howey. The material point I really want to make here is that the expectation of profit prong of a Howey investment contract analysis sets a pretty low bar. If you study the cases a bit more, I think you would come to appreciate just how low.

      Kind regards,

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