Securities have been in the mainstream news lately, spilling over from the financial sections of the newspaper and newscasts to become top story items. Many people are confused, however, not knowing what exactly a security is. Knowing what a security is (and is not), how profit is generated, and a product’s status as a potential security will help anyone planning to invest their money, as well as helping those who want a better understanding of any and all financial news.

The Howey Test

The Howey test is a three step process used to determine if a product or offering is an investment contract, or in other words, a security. The test stems from a 1946 Supreme court case involving the Securities and Exchange Commission versus W. J. Howey Company. The court found that an investment contract is an investment of money or other tangible consideration in a common enterprise with reasonable expectations of profit derived solely from the efforts of others, i.e. investing money into a business where a profit is gained without effort on the investor’s part is a security.

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