Why the 'Common Enterprise' Prong is the SEC's Sharpest Legal Tool

The Howey Test's Core: The SEC's enforcement strategy hinges on the Howey Test, a three-prong framework for defining an investment contract. The third prong, requiring a 'common enterprise' where investor profits are tied to the efforts of others, is the agency's sharpest tool.

Decentralization is the Defense: Protocols argue they are sufficiently decentralized, making profits independent of a central promoter's efforts. The SEC counters that token launch structures and ongoing development by core teams like Solana Labs or the Ethereum Foundation create a de facto common enterprise.

Precedent vs. Innovation: Legal precedents from SEC v. Telegram and SEC v. Ripple establish that initial fundraising and marketing create a common enterprise. This directly challenges the foundational token models of projects like Filecoin and early Ethereum.

The Technical Reality: The legal definition of a 'common enterprise' often ignores the post-launch technical reality. A protocol like Uniswap, governed by a DAO and with immutable core contracts, presents a fundamentally different case than a project whose roadmap is controlled by a single entity.

Common Enterprise is the linchpin. The Howey Test's other prongs are often debatable, but the horizontal commonality of token ecosystems is undeniable. Every token holder's profit is tied to the same core protocol development and marketing efforts, creating a unified financial interest.

Protocols are the enterprise. The SEC argues that entities like Uniswap Labs or the Solana Foundation constitute the managerial 'entrepreneurial' effort. Token value appreciation is not from individual effort but from the collective work of these core teams and their funded developers.

Contrast with pure commodities. Unlike oil or wheat, a token's utility is inseparable from the promoter's success. The Ethereum Foundation's roadmap execution directly impacts ETH's value, creating a legal tether that commodities lack. This is the SEC's primary evidence of a security.

Evidence: The Ripple Ruling. The court's partial summary judgment hinged on this distinction. Institutional sales were deemed securities due to the explicit common enterprise with Ripple Labs, while secondary market sales lacked that direct contractual relationship, highlighting the prong's critical role.

Common Enterprise Doctrine Dominates: The SEC's primary legal argument is the Howey Test's 'common enterprise' prong. It asserts that token value is tied to the managerial efforts of a core team, like Ethereum Foundation or Solana Labs, creating a shared financial fate.

Investment Contract Nuance: This focus bypasses debates about 'investment of money' or 'expectation of profit'. The SEC's strategy, seen in cases against Ripple and Coinbase, is to prove that token holders' fortunes are inextricably linked to the promoter's work.

Counter-Intuitive Defense: A successful defense requires proving decentralization eliminates managerial efforts. The Ethereum transition to proof-of-stake complicated this, as the Foundation's ongoing influence remains a target for scrutiny by regulators.

Evidence in Precedent: The SEC vs. Telegram case set the precedent. The court ruled the Gram token was a security because Telegram's pre-launch efforts were the essential driver for its future value, a template now applied broadly.

The Common Enterprise Prong is the SEC's primary legal lever. It argues that token value is tied to the managerial efforts of a core team, not just code. This transforms a decentralized network into a centralized security.

Protocols are the Enterprise. The SEC's case against Uniswap Labs hinges on this: the UNI token's value is allegedly derived from the company's development of the Uniswap protocol and governance. This logic applies to Aave and Compound.

Code is Not a Defense. The 'sufficiently decentralized' argument fails in court. The SEC's position is that the initial development team's efforts create the expectation of profit, establishing the common enterprise at launch.

Evidence: The Ripple vs. SEC ruling created a split between institutional sales (securities) and programmatic sales (not securities), but the core 'common enterprise' finding for direct sales remains the SEC's blueprint.

The Howey Test's Sharpest Prong. The 'common enterprise' prong is the SEC's primary legal tool. It argues that token holders' fortunes are inextricably linked to the efforts of a core development team, like Ethereum's core devs or the Uniswap Labs team, creating a horizontal commonality of risk.

Decentralization is the Counter-Argument. The core defense against this is proving a protocol is sufficiently decentralized, where no single entity's efforts determine success. The SEC's actions against Ripple, Coinbase, and Uniswap test the boundaries of this definition, arguing that even delegated governance constitutes a common enterprise.

Code is Not a Neutral Shield. The SEC's position is that publishing open-source code like the ERC-20 standard does not absolve the initial promoters. If a founding team, like the Solana Foundation, continues to fund development and marketing, the enterprise remains 'common' under the law, regardless of token distribution.

Evidence: The Hinman Speech Fallout. The contradictory 2018 'Hinman Speech,' which suggested a sufficiently decentralized asset might not be a security, now haunts the SEC. Its internal rejection in subsequent cases proves the agency's hardened stance: pre-launch marketing and ongoing development are the evidence it uses to establish a common enterprise for nearly all Layer 1 and app tokens.

The Howey Test's Core Prong determines if an investment contract exists. The common enterprise prong is satisfied when investor fortunes are interwoven and dependent on a promoter's efforts. Token projects like Solana (SOL) and Filecoin (FIL) faced this exact scrutiny in their early days.

Code is Not a Shield. The SEC argues that decentralized governance and automated smart contracts on networks like Uniswap or Compound do not negate the initial common enterprise formed during the fundraising ICO/IDO. The initial development team's managerial efforts create the dependency.

The Counter-Argument Falters. Defenses citing sufficient decentralization (e.g., Bitcoin, Ethereum) are exceptions, not the rule. For a new L1 like Aptos or Sui, the core development team's ongoing, essential role in protocol upgrades and ecosystem growth directly maps to Howey's 'efforts of others' requirement.

Evidence: The Ripple Ruling. The July 2023 summary judgment found XRP sales to institutional investors constituted a securities offering under Howey, hinging on Ripple's promotional efforts creating a common enterprise. This sets a direct precedent for venture capital token purchases and early ecosystem grants.