Howey Test
A four-part legal test asking whether people put in money, into a common enterprise, expecting profits produced by the efforts of others.
United States courts use the Howey test to decide whether an arrangement is an investment contract, and therefore a security, regardless of what the arrangement is called. The four elements are an investment of money, in a common enterprise, with an expectation of profit, derived from the entrepreneurial or managerial efforts of others. Applied to digital assets, the contested element is usually the fourth: whether buyers are relying on an identifiable team to build, promote, and support the network. The test looks at the economic reality of the transaction and at the promises made around it, not at the code.
In practice
In the Howey case, buyers purchased strips of orange grove and simultaneously signed a service contract handing cultivation and sale back to the promoter, which the court treated as an investment contract even though land is not a security.
The common misunderstanding
That the test asks whether a project is decentralized, when decentralization is not one of the four elements and matters only insofar as it bears on reliance on the efforts of others.