Why Programmatic Buyers Are Not Investors Under Howey

Programmatic buyers are not investors because they lack a 'common enterprise' with the token issuer. Purchasing a token on Uniswap or Curve is a bilateral swap, not an investment in the protocol's managerial efforts.

The Howey Test fails on 'expectation of profits' for DEX traders. Gains are from market-making algorithms and liquidity pools, not from the managerial labor of a centralized promoter like a traditional ICO.

This creates a critical legal moat for DeFi. Protocols like dYdX and GMX operate order books and perpetual swaps where users are counterparties, not security holders, insulating them from SEC jurisdiction.

Evidence: The SEC's 2023 case against Coinbase targeted staking services and listed tokens, but explicitly excluded the act of trading on the platform's exchange, acknowledging this functional distinction.

Acquisition is non-investment: The Howey Test's first prong requires an 'investment of money'. A user swapping ETH for UNI on a decentralized exchange like Uniswap or Curve is making a purchase, not an investment. The transaction is with a liquidity pool, not a corporate promoter.

No common enterprise: The second prong fails because the buyer's fortunes are not tied to the managerial efforts of a promoter. Value accrual for a token like MakerDAO's MKR depends on collective protocol governance and market demand, not a central company's performance.

Expectation of utility, not profit: The critical third prong examines profit expectation. A developer buying Chainlink's LINK to pay for oracle data seeks a functional input, not a speculative return. The primary motive is consumption, which the SEC's Framework acknowledges.

Evidence: The 2019 SEC Framework explicitly states that a token sold for consumption is not a security. This is the legal bedrock for programmatic DEX sales, distinguishing them from initial coin offerings (ICOs) targeted at investors.

Programmatic buyers are not investors. The court ruled these buyers on secondary exchanges like Coinbase lack the expectation of profits from Ripple's efforts, failing the third prong of the Howey Test. This is a direct rejection of the SEC's 'all tokens are securities' stance.

The precedent carves out secondary markets. This creates a legal shield for the vast majority of crypto trading activity, where tokens like ETH or SOL are purchased for utility, not as investment contracts. The SEC's case-by-case approach is now mandated, not its preferred blanket enforcement.

The SEC's primary market argument is weakened. While institutional sales were deemed securities, the logic is confined to direct, contractual sales. This undermines the SEC's strategy of using secondary market trading to retroactively classify all prior token distributions as unregistered securities offerings.

The SEC's core argument conflates programmatic buyers with investment contract participants. The agency's position in the Ripple case argued that blind exchange purchases constitute an investment in a common enterprise, ignoring the absence of a direct contractual relationship between the buyer and the issuer.

Judge Rakoff's dissent in the Terraform case provided the flawed blueprint. His reasoning that a token's value is 'derived from' the issuer's efforts incorrectly expands Howey. This logic would classify any secondary market asset as a security if its value is linked to a company's success.

Programmatic buyers lack contractual privity. Unlike direct ICO participants who enter a deal with the issuer, an on-chain Uniswap swap involves no promise from the token creator. The buyer interacts with a smart contract and a liquidity pool, not the development team.

The 'common enterprise' requirement fails. Purchasing ETH on Coinbase does not create a horizontal commonality with other buyers or the Ethereum Foundation. The buyer's profit depends on market forces and network utility, not the managerial efforts of a promoter.