Security tokens: what they are and how US rules treat them
A security token is a blockchain token that stands for an investment or financial claim. US law usually applies securities rules, and the Howey test decides.
Vahe HakobyanEditor-in-chief
Updated Oct 5, 20264 min readFact-checked
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- The Howey test asks if buyers expect profit from others.
- Rights come from the token terms, such as dividends or voting.
- Utility tokens are built for network use, though buyers may speculate.
- US sales usually need SEC registration or an exemption.
- Thin trading and custody rules can make resale harder.
The label depends on the facts of each sale, not on the token's name. A token can stand for a share of profits, a vote in a company, or ownership of an asset. It can also be designed for use inside a network, and buyers may still treat it as an investment.
What makes a token a security?
The SEC and US courts use the Howey test. It asks whether people invest money in a common enterprise and expect profit from the efforts of others. A token can be a security even if its creators call it a utility token. The facts of the sale matter more than the label.
What rights do security tokens give?
The rights come from the token's terms and any offering documents. A token may carry one right or several. It does not automatically pay dividends or share profit.
- A share of profits from a business
- Dividends or interest payments
- Voting rights in a company
- Ownership of a building, fund, or other asset
How do they differ from utility tokens?
Both are crypto tokens, and both can run on the same blockchain. Utility tokens are designed for network access, such as paying for computing or storage. Buyers may also treat them as investments, so a utility token can still be a security under the Howey test.
How are they issued and traded?
A company that offers security tokens to US buyers usually registers the offering with the SEC or uses an exemption. A common exemption is Regulation D, which often limits sales to accredited investors. Trading usually happens on a regulated platform, such as an alternative trading system, rather than a regular crypto exchange.
What limits should you know?
A security token can be hard to sell because the pool of buyers is limited, and trading can be thin. Custody rules limit which platforms can hold the tokens for you. US rules for crypto securities are still changing.
Frequently asked questions
Yes. US residents can buy them, but the offer and sale must follow securities laws. Some sales are open only to accredited investors or through a registered offering.
Not always. A registered offering can be open to any buyer, while a private placement under Regulation D usually limits sales to accredited investors. An accredited investor meets SEC income or net worth thresholds.
The IRS treats crypto as property. Selling a token for more than you paid usually creates a capital gain, and payments you receive in tokens are usually income.
Usually not. A regular crypto exchange generally must register as a national securities exchange or run an alternative trading system to list them.
