Why Promotional Efforts Trigger Howey's Fourth Prong

Marketing creates profit expectation. The Howey Test's fourth prong asks if a buyer's profit is derived from the efforts of others. Airdrop farming guides, influencer campaigns, and roadmap hype are promotional efforts that signal future value appreciation, satisfying this prong for regulators like the SEC.

The network effect trap. Protocols like Uniswap and Aave need liquidity and users to function. Their marketing targets speculators, not just utility-seekers. This incentive mismatch conflates user acquisition with investor solicitation, creating a legal vulnerability that pure utility tokens avoid.

Evidence from enforcement. The SEC's case against Ripple's XRP centered on promotional materials and public statements that framed the token as an investment. This established a precedent where marketing narrative, not just technical function, defines a security.

Promotion is Managerial Effort. The SEC's core argument is that a development team's promotional work—marketing, ecosystem growth, governance—is the functional equivalent of a manager's effort in a common enterprise. This transforms a token from a passive asset into an investment contract.

The 'Essential' Factor. The legal precedent hinges on whether the promoter's efforts are 'undeniably significant' and 'essential' to the enterprise's success. For a protocol like Uniswap or Aave, ongoing development and liquidity mining are not optional; they are the product.

Counter-Intuitive Reality. A fully decentralized, autonomous network with no core team might pass the test. However, any project with an active foundation (e.g., Solana Foundation, Ethereum Foundation) conducting roadmap updates or grant programs is demonstrating managerial control.

Evidence: The Ripple Ruling. The court in SEC v. Ripple distinguished between institutional sales (investment contracts) and secondary market sales. The key differentiator was Ripple's direct promotional efforts targeting institutional buyers, which constituted the required managerial effort for those specific transactions.

Protocol dependency creates a common enterprise. When a token's utility is exclusively tied to a single protocol like Uniswap or Aave, its value is directly derived from the managerial efforts of that protocol's developers. This functional lock-in satisfies the 'common enterprise' prong of the Howey Test, as investor profits are inextricably linked to the success of a third party.

Promotion transforms utility into an investment contract. Marketing that highlights token price appreciation or staking yields, rather than pure utility for accessing a service, frames the asset as an investment. This shifts the legal focus from a consumptive good to a speculative instrument, directly invoking the 'expectation of profit' prong.

The SEC's actions against Coinbase and Kraken demonstrate this line. The agency alleged that staking-as-a-service programs, where the platform performs managerial functions, constituted unregistered securities offerings. This establishes precedent that delegated managerial effort triggers Howey.

Evidence: The SEC's complaint against Terraform Labs hinged on algorithmic stability and promotional claims, not just code. It argued that marketing created profit expectations from the collective work of the developers, satisfying the fourth prong.