Update: Skadden Securities Litigators Provide Inside Court Insights

The latest developments in the securities litigation realm bring to the forefront the continued relevance of the long-standing Howey test in determining the securities status of digital assets and tokenization ventures. Despite recent regulatory shifts allowing more flexibility in the realm of digital assets, the Howey test remains a pivotal factor in assessing securities classification.

In response to the evolving field of digital assets, the U.S. Securities and Exchange Commission (SEC) has signaled a change in tone from previous years and acknowledged that the majority of crypto assets are not securities. This shift has led to a surge in tokenization projects that seek to tokenize various real-world assets, such as investment funds and precious metals, offering investors access to digitized securities.

While the SEC aims to support and foster innovation within the digital asset landscape, its regulatory framework is bounded by existing securities laws and judicial interpretations. A recent ruling by the U.S. Court of Appeals for the Ninth Circuit in SEC v. Barry emphasizes the ongoing significance of the Howey test in determining securities classification.

Ninety years ago, under the Securities Act of 1933, Congress defined an “investment contract” as a type of security, with the Howey test solidifying this definition in the SEC v. W.J. Howey Co. case. The Howey test involves three key elements: an investment of money, in a common enterprise, with the expectation of profits from the efforts of others. Until any legislative changes occur, digital asset sales that meet the Howey test criteria are likely to be considered securities transactions.

Despite the recent leniency showcased by the SEC in certain cases, including the dismissal of non-conforming appeals under Chairman Paul Atkins, the Howey test remains a pivotal factor in determining whether tokenization projects may be deemed securities offerings. As Commissioner Hester Peirce highlighted in July 2025, tokenized securities are still subject to securities regulations, with the SEC maintaining its focus on the Howey test.

An illustrative case highlighting this regulatory landscape is the SEC v. Barry ruling on August 11, 2025. The case, involving sales of fractional interests in life settlements rather than tokenization, emphasized the underlying risk that tokenization projects may face when classified as securities offerings. Defendants in the Barry case sold fractional interests in life insurance policies to investors, with profits dependent on the longevity of the insured individuals.

In essence, the evolving regulatory environment surrounding digital assets underscores the enduring significance of the Howey test in determining securities status for tokenization projects. While the SEC has demonstrated a more flexible approach in certain circumstances, projects must carefully assess their classification under the Howey test to navigate the complexities of securities laws and regulations.