Howey Lives (but barely)

June 2, 2026

Perhaps the cleverest drafting move in the CLARITY Act is preserving Howey (SEC v. W.J. Howey Co., 328 U.S. 293 (1946)), in name while gutting it in effect. The bill never says Howey is overruled. It does not need to. The Senate substitute to H.R. 3633 (engrossed May 12, 2026) introduces a new §4B of the Securities Act of 1933, added by §102 of CLARITY, that takes the investment-contract concept as its routing rule and then immediately strips the consequences of investment-contract status away from the asset itself, away from the secondary market, and away from the most common distribution mechanics. Howey survives as a sorting test for which network tokens land in the “ancillary asset” bucket of the trichotomy Post #1 walked through. It does not survive as the Section 5 registration trigger it has been since 1946.

The post-2017 enforcement era ran on the assumption that Howey was the substantive trigger and registration was the consequence. SEC v. Telegram Group Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020), and SEC v. LBRY, Inc., 639 F. Supp. 3d 211 (D.N.H. 2022), are the canonical cases on the originator-controlled side. The SEC’s 2019 Framework for “Investment Contract” Analysis of Digital Assets (April 3, 2019) and the Hinman speech (June 14, 2018) tried to draw a line that token-issuance is an investment contract today but the token, post-decentralization, is not. SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308 (S.D.N.Y. 2023), got there by judicial route, distinguishing institutional sales (investment contracts) from programmatic secondary-market sales (not investment contracts). CLARITY codifies the Ripple distinction and then goes further. The investment-contract finding is preserved at the transaction level for ancillary-asset distributions. The asset, the secondary market, and gratuitous distributions are all reset to non-security.

The Four-Step Rerouting

Read §4B(b) end to end and the architectural move is obvious.

• Paragraph (1) provides that the offer, sale, or distribution of an ancillary asset by, or caused by, an ancillary asset originator (including through an underwriter) is treated as an offer, sale, or distribution of an investment contract involving an ancillary asset, except with respect to a gratuitous distribution. So the originator’s primary distribution is statutorily deemed an investment contract. Howey’s four prongs are imported wholesale, but as a label rather than as a test. The label triggers no Section 5 obligation. It triggers the §4B(d) disclosure menu and, if the issuer wants, the §103 Regulation Crypto exemption.
• Paragraph (2) of §4B(b) does the real work. A network token is treated as a non-security for purposes of §2(a)(1) of the Securities Act, §3(a) of the Securities Exchange Act of 1934, §2(a) of the Investment Company Act of 1940, §202(a) of the Investment Advisers Act of 1940, §16 of the Securities Investor Protection Act of 1970, and any state-law equivalent that is not also commodity-consistent. This is, functionally, a federal preemption of blue sky law as to network tokens, written into the asset definition. The investment-contract status of the offering does not infect the asset. Howey is a transaction test under §2(a)(1), and §4B(b)(2) simply reads §2(a)(1) (and its sister provisions) out of the network-token analysis. The disqualifying-financial-rights carve-outs in §4B(a)(7)(B), expanded by the §105 rulemaking directive, route any token that looks too much like debt, equity, a liquidation claim, an interest-bearing instrument, or an investment-company interest back into ordinary securities treatment. Reves v. Ernst & Young, 494 U.S. 56 (1990), and the family-resemblance test for notes thus retain bite, but only for the disqualifying-rights inquiry, not for network tokens that pass that gating screen.
• Paragraph (3) is the Ripple codification. Secondary-market offers, sales, or distributions of a network token by any person are treated as not involving the offer, sale, or distribution of a security under the same suite of statutes. The limitation in §4B(b)(3)(B) is structurally interesting and worth flagging. The secondary-market relief is unavailable if the network token was offered, sold, or distributed pursuant to the offer, sale, or distribution of a security by the originator or underwriter. Plain reading: if the originator chose to register the investment contract pursuant to which the token was issued, the secondary-market non-security treatment falls away. The bill thus penalizes the issuer who voluntarily registers. That is a clear structural choice in favor of the disclosure-only path. It is also a trap for foundations and other originators who, on advice of counsel, want belt-and-suspenders Section 5 registration. The price of belt-and-suspenders is losing secondary-market coverage for downstream holders.
• Paragraph (4) creates a presumption that a gratuitous distribution, by itself, does not constitute an offer, sale, or distribution of a security under the same suite of statutes. The anti-fraud and anti-manipulation authorities of the SEC, the CFTC, and state regulators are preserved by §4B(b)(4)(B). What §4B(b)(4) actually accomplishes is far broader than the word “airdrop” suggests. The defined term “gratuitous distribution” in §4B(a)(5) sweeps in self-staking, self-custodial staking with a third party, liquid staking (subject to administrative-or-ministerial-receipt constraints), custodial and ancillary staking services (subject to SEC rulemaking), programmatic and automated rules-based distributions, and a technology-neutral catch-all. That list, taken seriously, captures essentially every protocol-native issuance mechanism that has appeared in the last decade. LBRY’s holding that programmatic rewards constituted unregistered securities offers does not survive this paragraph in any practical sense, at least prospectively.
• §4B(b)(5) closes the loop with a procedural mechanism that runs against the issuer. The paragraph creates a rebuttable presumption that any network token is an ancillary asset (and therefore disclosure-triggering under §4B(d)) unless the originator or a digital asset intermediary submits a written certification, supported by reasonable evidence, that the token is not an ancillary asset. The Commission has 60 days from submission to issue an objection, with deemed effectiveness thereafter. The structural choice is to put the burden on the issuer to demonstrate non-ancillary-asset status. The default is disclosure; the exit is a Commission vote that cannot be delegated to staff or to an individual Commissioner under §4B(b)(5)(C)(iii)(II). That non-delegation requirement is deliberate. It forces the Commission to take public positions on close cases rather than retreating into staff no-action correspondence.

Stack the five paragraphs and the Section 5 registration question for an originator-controlled network-token distribution dissolves into a §4B(d) disclosure question. Howey survives in §4B(b)(1) as the label for what the transaction is called. It is not asked whether Howey is satisfied (it is statutorily deemed satisfied for ancillary-asset distributions other than gratuitous ones). And nothing turns on the answer at the asset level.

Disclosure Where Registration Used to Be

The substantive obligation under CLARITY runs through §4B(d), not Section 5. §4B(c) triggers initial and periodic disclosure on the earlier of a public-offering distribution by the originator (whether under Regulation Crypto, an effective Section 5 registration statement, a §3(b)(2) offering statement, or a §4(a)(6) crowdfunding offering) or the first secondary-market distribution that constitutes a public offering in the §4(a)(2) sense. Smaller offerings escape entirely. §4B(c)(1)(B) excludes any offering where aggregate gross proceeds were $5 million or less during the 12 months following the first offer, or where the 12-month average daily aggregate trading value across U.S. spot markets is $5 million or less (both adjusted for inflation).

The disclosure menu itself is more capacious than the comparable Form 10 or Form S-1 line items, and more flexible. §4B(d)(2)(A) requires basic corporate information: the experience of the originator, distribution history including price history, planned activities and anticipated costs to promote use and value of the asset, a going-concern statement from the CFO, ownership disclosures by ≥10 percent equity holders and senior management holding ≥5 percent of the asset, related-person transactions, and the current state and timeline for moving the distributed ledger system out from under coordinated control as defined by §104. §4B(d)(2)(B) layers on economic and technical information: a plain-English description of how the distributed ledger system functions, intended functionality and uses, total supply and emission schedule, governance and consensus mechanism, gratuitous-distribution recipients receiving more than 5 percent of total supply, external code audit information, custodial services available, and a technology description sufficient to permit independent verification of transaction history.

Financial statements are scaled. Under §4B(d)(2)(A)(vii), originators who have distributed less than $25 million in gross proceeds need only reviewed financials; above that threshold, audited. There is no equivalent of the §11 strict liability that attaches to registration statements, because §103(d)(2)(A) explicitly provides that disclosures furnished under §4B are not registration statements for purposes of §11 of the Securities Act, nor are they deemed filed under the Exchange Act. The §10b-5 and §12(a)(2) channels are preserved by §4B(h), and the §103(d)(1)(A) recharacterization of disclosures as “prospectuses” for §12(a)(2) purposes ensures rescission remedies for purchasers in Regulation Crypto offerings. Underwriter §11 exposure, which has shaped the economics of public-offering practice since 1933, is simply not present in the §4B regime. Whatever else CLARITY does, it removes the gatekeeper liability function the underwriter has played for ninety years.

§4B(c)(4) is the offshore-originator solution. A digital asset intermediary may satisfy the §4B(d) disclosure obligation in lieu of the originator, subject to allocation rules. The intermediary path is unavailable when the originator is U.S.-organized and the asset is offered domestically pursuant to Regulation Crypto, an effective Section 5 registration, a §3(b)(2) offering statement, or a §4(a)(6) crowdfunding offering. Translation: U.S. originators must own their own disclosure; offshore originators (or originators of tokens that arrived in U.S. markets by secondary-market migration rather than by primary offering) can outsource disclosure to the listing venue. The standard of liability under §4B(c)(4)(C) is something less than strict: the intermediary cannot file disclosures containing material misstatements or omissions unless it did not know and could not have known of the defect in the exercise of reasonable care. Exchanges become disclosure conduits with diligence-based liability. The structural choice here is to let foreign-organized issuers exist in U.S. markets without forcing a U.S. domestication, but to push the costs of compliance onto the venue that wants to list the asset. Coinbase, Kraken, and Gemini become §4B(d) filers for the long tail of foreign-originated tokens that trade on their platforms.

The §4B(d)(2)(A)(xv) decentralization-roadmap requirement deserves attention as well. The originator must disclose the current state and timeline for development of the distributed ledger system, detailing if, how, and when the system and the related ancillary asset are intended to no longer be subject to coordinated control. That is an affirmative obligation to plan for the §104 coordinated-control exit and to commit to reportable milestones. Practitioners drafting these disclosures should expect to be held to them. A roadmap filed in year one that bears no relation to the system’s posture in year three will look, at best, like a §4B(h) misstatement candidate, and, depending on whether circular value flows or timing manipulation under §4B(m)(2)(C) are also present, like a §4B(m) evasion candidate.

§4B(d)(3) provides the exit. A certification covered party (the originator, a subsidiary, a related person, or any entity in common control) may file a written certification, supported by reasonable evidence, that during the preceding 180 days no covered party has engaged in more than a nominal level of entrepreneurial or managerial efforts and that any such prior efforts were not a primary factor in determining the value of the ancillary asset. A §104(d) certification (the coordinated-control exit) must also be effective. The Commission has 90 days from submission to issue a written notice of objection or non-objection. Silence means deemed approval under §4B(d)(3)(B)(iv). Disclosure obligations terminate. This is the Hinman speech, codified, with a procedural backstop and a 90-day deemed-approval clock. It is also the practical end-state of the disclosure regime for any token that reaches a decentralized steady state: the originator files, periodically updates, and eventually certifies out.

§103 and the Capped Exemption

Section 103 of CLARITY directs the SEC to adopt Regulation Crypto, a new exemption from Section 5 registration for offers, sales, and distributions of investment contracts involving ancillary assets. The exemption is capped at the greater of $50 million per calendar year (for up to four years) or 10 percent of the dollar value of outstanding ancillary assets. §103(b)(1)(A). Total proceeds under Regulation Crypto across the life of the originator are capped at $200 million in the aggregate. §103(b)(2). Both caps adjust for inflation under §103(b)(3) and may be raised by the Commission on a two-year review cycle.

This is the back door, and it is narrow. A $1.7 billion Telegram-style raise (institutional pre-sales of SAFTs followed by a public launch of the network token) cannot fit through Regulation Crypto. It would have to take one of three other routes: registration of the investment contracts under Section 5 with a token-specific form, reliance on §4(a)(2) (and the new digital-asset modernization rules under §108 of CLARITY), or a §4(a)(6) regulation crowdfunding offering as recharacterized by the bill. The point worth underlining for clients is that the §103 cap is sized against the type of fundraising that produced the post-2017 enforcement cycle. Large pre-launch raises remain a registration question. Smaller raises, retroactive disclosure programs, and post-launch ongoing distributions are the constituency Regulation Crypto is sized for.

The §103 conditions matter. §103(c)(1) requires disclosures under §4B(d) at least 30 days before the first Regulation Crypto offer, sale, or distribution. §103(c)(2) imports the §104 coordinated-control restrictions on related-person dispositions. §103(c)(3)(A) excludes non-U.S.-organized originators, a meaningful change from current practice where offshore foundations regularly stand behind U.S. token distributions, and worth thinking through against the Wyoming DUNA and Marshall Islands DAO LLC frameworks. Bad-actor disqualifications under §103(c)(3)(E) through (H) track Rule 506(d) and Rule 262 with a 10-year felony lookback for insider trading, embezzlement, cybercrime, money laundering, terrorism financing, and financial fraud. The §103(d) status provision recharacterizes the disclosures: prospectus for §12(a)(2), statement for §17(a), §10(b), and Rule 10b-5, not a registration statement for §11 purposes, and not deemed filed under the Exchange Act.

The combined effect of §4B and §103 is to convert the registration question into a disclosure-and-cap question. Above $200 million in lifetime reliance, the issuer either registers under Section 5 (losing §4B(b)(3) secondary-market coverage in the process per the §4B(b)(3)(B) limitation) or uses another exemption, typically §4(a)(2) for institutional pre-sales. Below $200 million, Regulation Crypto with §4B(d) disclosure is the path. Both paths converge on the same §4B(d) menu and the same §4B(d)(3) exit.

What’s left of Howey

Howey now does three things in the network-token context.

• First, it sorts. The §4B(a)(1) definition of “ancillary asset” requires that the value of a network token be dependent upon the entrepreneurial or managerial efforts of an ancillary asset originator or a related person, as those concepts are further specified by the Commission by regulation. That phrase is Howey’s fourth prong, lifted and repurposed as a classification criterion. Network tokens whose value does not depend on the entrepreneurial or managerial efforts of an originator are not ancillary assets. They live outside §4B(d). Network tokens whose value does so depend are ancillary assets and trigger disclosure. Howey tells you which bucket the token sits in.
• Second, Howey polices the disqualifying-financial-rights exclusions in §4B(a)(7)(B). Any token that represents, gives the holder, or is substantially economically or functionally equivalent to a debt or equity interest, a liquidation right, an entitlement to a dividend or transfer of value from a person other than a decentralized governance system, or an investment-company interest, is excluded from network-token treatment and falls back into ordinary securities analysis. Howey, Reves, and the lineage of cases that runs through them remain dispositive for that gating screen. The drafting choice to vest the exclusion in “substantially economically or functionally equivalent” language ensures that this is where the major future contests will sit. Anti-evasion is reinforced in §4B(m), which expressly contemplates the removal of a disqualifying financial right paired with reintroduction through a related-person vehicle (a foundation, a DAO, a laboratory) as evidence of willful evasion. The §4B(m)(2)(C) factor list reads as if it were drafted with the post-2020 wave of foundation-and-protocol structures in mind.
• Third, Howey lingers in §4B(b)(1) as a label. An originator-controlled distribution of an ancillary asset is an offer, sale, or distribution of an investment contract involving an ancillary asset. That is a useful nominal fiction for §12(a)(2) and Rule 10b-5 purposes. It is also useful for anti-fraud authority that travels with the investment-contract designation. But it has no Section 5 consequence, and the §4B(b)(2) non-security treatment of the asset itself prevents the investment-contract label from infecting the token in secondary markets or on the books of any holder.

The retroactive piece deserves a moment. §4B(k)(1) bars the SEC and any private plaintiff from initiating, pursuing, or maintaining a §5 or §12(a)(1) action arising from pre-effective-date offers, sales, or distributions of ancillary assets, provided the originator (or certification covered party) complies with the §4B(c)(3) transition disclosure obligations. Anti-fraud actions survive under §4B(k)(2). Secondary-market pre-effective-date sales of network tokens are similarly retroactively cleansed under §4B(k)(3). The Telegram, LBRY, Kik, and Coinbase backlog of Section 5 enforcement risk substantially dissolves on the effective date. The Ripple institutional-sale holding remains as to the historical liability the SEC obtained, but no future SEC enforcement of analogous conduct can build on it. The 2019 Framework is, in any event, formally superseded by the joint SEC-CFTC interpretation effective March 23, 2026 (Release Nos. 33-11412 and 34-105020), which expressly displaces the prior Framework and the Commission’s staff statements on related topics. The Hinman speech, never Commission policy in the first place, retains only historical interest. What “ancillary asset” and “entrepreneurial or managerial efforts” mean going forward will be developed through the §4B(b)(5) prior-certification process, the §4B(d)(3) ongoing-certification process, and the Commission’s eventual §105 rulemaking, with the joint release’s analytical structure (essential managerial efforts as the operative concept, separation doctrine for when a non-security crypto asset ceases to be subject to an investment contract) as the relevant interpretive background.

Token offerings have moved from a registration question to a disclosure question. Howey still routes assets between the network-token bucket (disclosure regime) and the ordinary-securities bucket (registration regime), and still polices the disqualifying-financial-rights screen. But its central role in the digital-asset space since 2017, as the substantive trigger for Section 5 enforcement, is over. The structural questions that remain are no longer about whether Howey is satisfied. They are about whether the §4B(b)(5) prior certification will issue, whether the §4B(d)(3) exit certification will be granted, whether §104 coordinated control has dissolved, whether §4B(m) anti-evasion regulations will catch a particular structure, and whether the originator has correctly screened its instrument under §4B(a)(7)(B). Those are good questions, and they will keep this practice busy for the next decade (but they are not Howey questions).

Written by David Lopez Kurtz