Is SUB a Security?

Substratum had an ICO, were based in the U.S. and also took in funds from non accredited investors without KYC/AML enforcement. Also, there is no blockchain based network launched, therefore the tokens are still to this day considered “pre-functional” tokens which are likely securities.

Howey Test Origins

The Howey Test was created by the Supreme Court to determine whether certain transactions qualify as “investment contracts”. If they do so, under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and therefore subject to U.S. securities laws.

Some background on how the Howey Test originated came from the SEC v. Howey Co. court case, where Howey was the name of an agricultural company in South Florida. People came down to South Florida and actually had the opportunity to buy acres and half acres in this agricultural company.

Essentially, what Howey said to the people was: “Come on down and you’ll see all these citrus trees, we’re going to fertilize, we’re going to harvest them, we’re going to package it, we’re going to sell it, and we’re going to make a PROFIT, and we’re even going to share that profit with you and you can use that profit to make the payments on your land”.

One thing eventually led to another and Howey Agricultural went bankrupt. Surprisingly the one asset they had were all the seller backed financier arrangements on all the acreages on their farm. So naturally, they wanted to collect on all these notes to pay off debt.

When they went to collect on it, investors became infuriated because they were sold land but only bought it because Howey was running this Agricultural business. In turn, their sole reason for investing in Howey was because they told investors they would make a profit and they could use that money to pay for the land they bought from Howey.

So, since the company was not running anymore, how could all these investors make the payments for the land they bought?

What resulted from this case now gives us a blueprint to how securities can be identified and the regulation they must undergo in accordance to U.S. Securities laws.