The Howey Test: Would Your Crypto Offering Pass or Fail?

Before you launch your next crypto token, you should see if you can pass the test.

It is not the smell test with investment bankers.

The Howey test will help you understand if your crypto is one of many digital securities which would present more legal responsibilities, such as disclosure and registration requirements.

The U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. was a 1946 Supreme Court decision about citrus grove buyers in Florida. The Howey Company sold citrus groves to investors who leased the land back to Howey. The company’s employees managed the groves and sold the fruit on behalf of the investors. Both the company and the investors profited from the venture.

The investors only needed to supply capital to the arrangement, while others took care of all the other details. An investment contract is what you get when your transaction passes the Howey test.

Of course, this concept impacts things beyond citrus fruit. It is also applicable to the cryptocurrency market. In fact, there are four factors to consider which separate a security from a commodity:

  • An investment
  • A common enterprise
  • A profit expectation
  • Generated from the work of third-parties

In the U.S., the SEC has deemed bitcoin not to be a security. The issuer, an anonymous Satoshi Nakamoto, released all 21 million tokens at once as part of a contract. None of the tokens went to him or a company treasury. When the tokens were released, they had no value, and when they gained value, Nakamoto did not receive any benefit.

In effect, he removed any possible connection between “common enterprise” from the other factors, which disqualifies the venture as a security under the Howey test.

SEC Chair Gary Gensler said, “at the core, these (altcoin) tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group,” during an interview with New York Magazine.

However, Rostin Behnam, the chairman of the Commodity Futures Trading Commission (CFTC), said Bitcoin is not the only commodity. He called another crypto coin—Ethereum—a commodity during a hearing before the Senate Agriculture Committee. In fact, Ethereum has been listed on CFTC exchanges for some time.

An interagency council comprised of state and federal banking officials, as well as commodity, securities and consumer protection groups, agreed in a report that there is not a comprehensive regulatory framework for digital assets. Hence, the reason for differing stances within the industry.

Right now, asset classification dictates how digital assets are regulated. If it is a payment, then it falls under the purview of Money Services Business and the Office of the Comptroller of the Currency. Likewise, CFTC oversees commodities, and the SEC has jurisdiction over securities.

Recently, the SEC has filed a complaint against Binance and Coinbase, alleging that they are selling unregistered securities. The complaint mentioned several coins that could be viewed as securities: Polygon, Cardano and Solana. Soon after the announcement, Robinhood—another crypto exchange—delisted the three mentioned coins.

Binance.US has decided to become a crypto-only exchange, ending US dollar deposits and withdrawals. The SEC wants a federal judge to freeze the exchange’s assets, including $2.2 billion in crypto and $377 million held in dollars.

Either the Coinbase case or the Binance case could make its way to the U.S. Supreme Court, which could in effect create the path for industry regulation with its ruling. As part of a possible outcome, the High Court could also rewrite the Howey test or revise it in relation to digital assets.

At the 2023 Global Exchange and Fintech Conference, Gensler said congressional action is not needed because the laws are already on the books. “Not liking the law, not liking the rules is different than not hearing it or not getting it,” he said. However, this view fails to recognize that the current regulatory framework is not black and white for investors and institutional players.

Under federal securities laws, a company must register with the SEC before offering or selling securities. As part of the registration process, an issuer must disclose financial statements that have been audited by a public accounting firm. These documents provide important information that helps investors make informed decisions about their investments.

As the digital financial assets space grows, more large corporations can be found with crypto on their balance sheets. A 2022 Deloitte Global Corporate Treasury Survey found that 40% of interviewed finance executives said they have already implemented blockchain or they are considering it.

In the short term, issuers will need to work with a law firm with expertise in crypto and digital currencies to navigate the impact of the courtroom rulings and the subsequent new era of regulation on their business.

Make sure your company will be able to pass the test in the evolving legal landscape.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or

7 Ways to Align Executive Pay with Dodd-Frank

Connecting executive compensation with financial performance took a while to implement—and it wasn’t easy.

Toward the end of last year, the U.S. Securities and Exchange Commission voted 3-2 to accept the “clawback” rules, which are intended to discourage senior leadership from making risky corporate decisions for short-term gain, resulting in restated financial statements.

In short, the SEC called out two types of triggering events involving material and non-material changes to financial statements. And the last part, referred to as “Little Rs,” is why the SEC vote was not unanimous.

Two SEC Commissioners, Hester Peirce and Mark Uyeda, voted no because the new rule included non-material changes.

SEC Chair Gary Gensler, however, supported the rule, citing the fact that corporate restatements have increased to nearly 75% from 35% in recent years. “If the financials are inaccurate, why should executives be getting paid incentive comp on financials that were inaccurate,” he said in an interview with Thomson Reuters.

Here are seven insights to ensure your executive compensation is aligned with the Dodd-Frank Act:


Require Shareholder Advisory Vote

Public companies are required to hold a non-binding advisory vote for their shareholders on the topic of executive compensation at least once every three years.

Although the frequency vote gives shareholders four options, including “abstain,” making the vote an annual tradition is the best practice.

At the end of May, Russell 3000 companies have only failed 1.5% on Say on Pay, according to Harvard Law School Forum on Corporate Governance. The current failure rate is 130 basis points lower than last year. In addition, the percentage of Russell 3000 companies receiving more than 90% support (i.e., 78% vs. 75%) is also higher than last year.

Investors are now able to vote on the compensation of the top executives in a public company, which includes the CEO, CFO and at least another three highly paid executives.


Bolster Independence for Compensation Committee

The compensation committee balances investor expectations along with a company’s financials to form employee retention strategies. In recent years, however, the role has evolved. Two-thirds of surveyed companies have expanded the role of their committee by expanding the charter or the name as well as the charter, according to the Center On Executive Compensation.

Institutional investors are driving change with more focus on the environment, talent and diversity and inclusion. New topics like human capital metrics, safety and wellbeing, culture and employee engagement are now falling under the compensation committee’s purview.

Strengthening independence requirements for committee members is more important than ever.


Added Disclosure on Conflicts for Consultants

Compensation consultants can serve as an invaluable resource for up-to-date pay rates, ongoing compensation trends and incentives to foster employee performance.

The Dodd-Frank Act requires more disclosure about the portion of compensation consultants and any potential conflicts. Stock exchanges must have listing standards that create greater independence for all compensation committee members, including consultants.

For example, exchanges must consider the source of all compensation to the director and whether the director is affiliated with the issuer via a subsidiary or affiliate.


Oversight of CEO/Rank Employee Ratio

The Dodd-Frank Act requires public companies to disclose the CEO pay ratio, which compares a CEO’s compensation to pay for median employees.

In 2021, CEOs were paid 399 times as much as a typical worker—a 1,460% increase since 1978. The shift in executive compensation to stock-related investments, which represents roughly 80% of the gains over the decades, is cited as one of the driving forces by the Economic Policy Institute.

Even though the SEC strongly encourages companies to follow generally accepted accounting principles (GAAP) metrics to ensure integrity, companies are only required to provide the CEO pay ratio without context or a long discussion, which can be found, however, in the compensation and analysis parts of a proxy statement.


Disclose Pay Versus Performance

Last summer, the SEC adopted amendments to require companies to disclose information that links executive compensation and financial performance.

For the five more recent fiscal years, the amendments require companies to provide a table of executive compensation and financial performance measures, including total shareholder return, as well as the total shareholder return of companies in the registrant’s peer group, its net income and a financial performance metric of the company’s own selection. Companies are also required to provide a list of three to seven financial performance measures that they deem important for connecting executive compensation and company performance.


Mandate Recovery Policies for Restatements

The SEC requires companies to implement policies to recover awarded, incentive-based compensation resulting from an accounting restatement from past and existing executive officers, no matter the level of involvement. As a result, stock exchanges must have listing standards that require companies to adopt a written “clawback” policy, which they will disclose as an exhibit in Form 10-K and on the cover of annual reports.

All types and sizes of restatements can trigger a clawback, including ones that materially impact the financial statements in the current year and ones that don’t from prior fiscal periods.

Companies must recover the compensation that is erroneously awarded and received by an executive in the three years preceding the date of the restatement.


Disclose Hedging

A company must disclose the ability of employees, officers and directors who can use equity securities granted as compensation to hedge. The company must comply by disclosing the practices in full or providing an accurate summary. If the company doesn’t have any hedging policies, then it must disclose that hedging is permitted.

Companies should review their current hedging policies with an attorney and consider updating or streamlining the document. Does your current policy cover the correct category of employees or enough detail about transactions?

Review these items carefully with an attorney to make sure pay is aligned with the Dodd-Frank Act.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or


6 Ways to End Partnership Disputes

Business partnerships are not always meant to last.

And that includes the successful ones.

Countless reports pin the fail rate at around 70% in the first year. A lack of a detailed partnership agreement upfront usually plays a role. Some partners want to work on the business, while others may want to work in the business. For a couple of months, that arrangement may work. But once it’s clear the other partners are working 25 hours a week, and you’re grinding more than 60 hours, things will change.

Communications may become strained or end.

Regarding the “successful” business partnerships, life tends to get in the way, and some partners may want to retire at some point.

Like any business transaction, always begin at the end. Before you spend so much energy on the entry point, invest the time in your exit strategy.

The odds make it clear that your business partnership will end in some type of dispute.

But what are your options?

Here are six possibilities to consider:

Business Attorney Insight: Mediation

Discussing the disputed matter(s) with your partner should yield results, but it may take a trained mediator to get the job done. Mediators help open the lines of communication and characterize each stance in less provocative ways.

Bringing each partner back to the overall mission—the good of the company—should help create a path forward since it’s the reason each partner signed on in the first place. Focusing on the project as opposed to personalities will increase your odds of resolution.

Business Attorney Insight: Buy Out

You should have included a buyout provision in your partnership agreement. However, if that is not the case, then leverage your buy-sell agreement, which generally is included in partnership agreements.

A buyout agreement should be drawn up by your attorney and given to the exiting partner. You should also work with a financial advisor who can help put dollar amounts on assets. Please do not use a boilerplate template that you found online. Every partnership, not to mention the situation, is unique, and this type of transaction typically involves too much value to leave to a form letter.

Business Attorney Insight: Sell

Like many of the other options, selling can be relatively easy or difficult.

If your partnership agreement addresses what happens when partners sell their interests, this matter should be over quickly. Some agreements provide the existing partners with first dibs on the exiting partner’s equity.

However, if the partners are only given the right of first refusal, then this adventure could take time if it’s shopped around. And then, the question becomes about how the daily operations of your company will be impacted with a potentially disgruntled partner looming around the office and representing the company with A-list clients.

Business Attorney Insight: Freeze-Out

A freeze-out merger happens with a majority stakeholder in a company with another company that they own and control. Then, the majority shareholder submits a tender offer to the original company to force out the minority shareholders. If it’s successful, all the assets from the original company may be moved over to the newly created company.

The courts prefer a merger to another case, so they tend to rule in favor of these mergers, especially if the majority stakeholder makes a strong connection to a corporate purpose backed by sound business judgment.

This is another reason you have an attorney on your team.

Business Attorney Insight: Dissolution

Refer to your partnership agreement for this one. Most agreements include how the assets will be divided and distributed when the relationship is dissolved.

If your partnership agreement doesn’t include this provision, then you may be subject to the Uniform Partnership Act of 1997, which was proposed by the National Conference of Commissioners on Uniform State Laws to govern business partnerships in the United States. To date, 37 states, including Connecticut, have ratified the agreement (check with your lawyer for details).

Dissolution may end a partnership, but not the operations of a company, which shifts its activities to closing accounts, as well as selling and disposing of assets. This part could take many months, depending on the size and complexity of your company.

Business Attorney Insight: Litigation

Business partnerships include more than one agreement.

There’s one for the partnership and another for operations. There are agreements for employment and non-compete terms. Typically, there are also non-disclosure agreements to protect company investments.

If any of these contracts are breached, then that could trigger litigation for resolution.

Examples could include misuse of company assets, failure to disclose potential conflicts of interests and sharing copyrights or trade secrets.

One day, your business partnership will end. Consult with your business attorney for a favorable outcome to your hard work.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or

5 Reasons Why Your Non-Compete Agreement Doesn’t Work

The Federal Trade Commission is considering making non-compete agreements a federal issue by banning them.

According to research, one in five employees have a non-compete, which is about 30 million Americans. The FTC claims a ban would lead to better job opportunities and increase wages by $300 billion a year.

Companies would have to find another strategy to protect investments. But it could take years for a final outcome, accounting for passage and pending court challenges.

Right now, however, employers have a bigger concern: Are their existing non-compete agreements enforceable?

The answer presents a real issue for too many companies—and they don’t even know it.

Here are five common reasons why non-compete agreements fail:


Attorney Alert: No Consideration

This is one of the most common problems with enforceable non-compete agreements.

When you onboard a new employee, employers should make the signing of a non-compete agreement part of the process. To create a valid agreement, you must offer the new employee “consideration,” which means an exchange of value. Because you ask new employees to sign on day one, you can write into the agreement that the job and future compensation are consideration for the signature.

If you need an existing employee to sign a non-compete agreement, you will have to put more effort into it. Maybe it is a new title, more money and/or different responsibilities at the company. The “consideration” doesn’t have to be large, but it needs to be real and distinguishable.

Otherwise, you may have an unenforceable non-compete agreement that you assumed was valid.


Attorney Alert: Too Long in Duration

The objective of non-compete agreements is to protect the company, not to punish your employees. Asking for a non-compete for the rest of someone’s life is a non-starter.

Courts have ruled favorably, however, on shorter terms. Generally speaking, six months is practically a certainty. Yet, more than two years could get tricky. If it involves an acquisition, you may be able to get three years.

In any case, you should consult with your lawyer because these matters, especially the ones involving longer terms, tend to be decided on specifics. So, make a small investment to spend time with your trusted counsel—you will thank yourself later.


Attorney Alert: Reliance on a Template

Don’t fall for convenience and use a template for your non-compete agreement. And that goes for older, outdated forms your company has used since its inception.

Every industry is different. Every company is different. Types of proprietary information and confidential relationships vary quite a bit.

What if your company crosses state lines? What if your company has employees who work in different states? When it comes to law regarding non-compete agreements, each state makes the call.

Your leadership team should protect its interest by consulting with an attorney to ensure nothing is lost in the future.


Attorney Alert: No Assignment Provision

When acquiring a company, too many companies forget to obtain non-compete agreements from key personnel at the other company. This oversight can be costly.

One reason for the miscue, in part, is the assumption that the acquired company had included an assignment provision in their non-compete agreements. An assignment clause allows one party to transfer negotiated rights to another party—without re-opening negotiations.

Assignment provisions (i.e., Company A or assignee) can make things easier. Without them, you will have to ask the incoming employees to sign another non-compete agreement, which could prompt talks regarding more consideration.

Some states may prohibit or limit assignment clauses, so review them with your attorney.


Attorney Alert: Not Compliant With State Law

In addition to being a case-by-case matter, non-compete agreements hang on a state-by-state basis.

For example, these agreements are not enforceable in Oklahoma and California. Nine other states prohibit non-competes for employees who earn more than a set amount. Iowa and Kentucky only prohibit the agreements for health care workers.

In Connecticut, “reasonable” non-compete agreements are enforceable. But that means several details will have to be reviewed to determine validity: Is it too long or too restrictive? Is it fair? Does it prevent the employee from making a living?

Your lawyer will guide you down the right path.


(Joseph M. Pastore III is Chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or




5 Reasons Why Business Partnerships Fail

William Proctor and James Gamble figured out how to do it in 1837.

Ben Cohen and Jerry Greenfield found out that success could be sweet in 1978.

Larry Page and Sergey Brin started their own brand of digital domination in 1998 before most knew what they were talking about.

Today’s stock market is filled with prosperous corporations that began with a business partnership. Although those who succeed tend to grab the headlines, all the rest fade away.

According to BLS data, 45% of new businesses fail during the first five years and 65% fail during the first ten years.

Hiring an attorney at the onset of a business partnership can dramatically increase your chances of a favorable outcome. Lawyers can help partners decide the best corporate structure and draft documents that will add clarity and resolve disputes to keep the organization moving forward.

Unfortunately, business partnerships that don’t work with a lawyer as their first step bear more uncertainty.

Here are the five most common legal claims that cause business partnerships to fail:

Attorney Alert #1: Breach of Partnership/Operating Agreement

Don’t enter into a business partnership without a written agreement that clarifies many important variables, such as your responsibilities, compensation and exit.

In fact, negotiating the partnership agreement should be part of your process to determine if this company is the best fit for you. The time spent on this dialogue will be invaluable.

For example, how are profits distributed? What happens when one partner doesn’t want to take the distribution in that year? Will you have the right of refusal when your partners bring forward a prospective partner? How will each partner exit without harming the interest of the company?

A thoughtful partnership agreement will go a long way to building stronger relationships—and mitigate one of the most common causes of failure for business partnerships.

Attorney Alert #2: Breach of Fiduciary Duty

Fiduciary duties are included in business partnerships.

The interests of the partnership, for instance, should be held paramount compared to your own self-interests. This is referred to as the Duty of Care. You should also avoid self-dealing situations where you benefit at the expense of your partners—also known as the Duty of Loyalty.

Failing to account for company funds, sharing trade secrets or acts that benefit a competitor are also examples of a breach of fiduciary duty.

In an attempt to mitigate this potential cause for business partnership failure, partners could be required to review their fiduciary duties in writing and sign their names periodically to keep these responsibilities top of mind.

Attorney Alert #3: Failure to Delineate Authority

When partners enter a business venture, it is often assumed that each partner will work an equal amount. And that’s why issues happen.

Andrews Campbell, who published “Collaboration Is Misunderstood and Overused” in the Harvard Business Review, writes that success depends on three circumstances:  1) partners need to be truly committed to working with each other, 2) partners have high respect for each other’s expertise, and 3) each partner has the skill to bargain with each other over cost and benefits.

The last circumstance could be the sole reason to hire an attorney to draft documents to increase the odds that the collaboration will be a success. For instance, each partner should clearly understand their responsibilities as part of operations and the leadership team. Blurred lines will lead to disagreements and a waste of time of redundancies.

A semblance of hierarchy needs to be established so the company can move forward. Delineated authority would ensure that all mission-critical areas are covered by the partners.

Attorney Alert #4: Gross Negligence

Partners are responsible for providing a certain standard of care. When that doesn’t happen and harm is caused, a matter of gross negligence can cause irreparable damage and end the partnership.

Mismanaging partnership funds, failing to abide by contracts and hiring unqualified, key personnel could trigger a claim of gross negligence.

A court would apply the business judgment rule, which is a standard that examines if the action in question was done in good faith with the care of a “reasonably prudent person” and with the understanding the partner is acting in the best interests of the company.

If gross negligence can be proven, unfortunately, it would knock down that level of protection.

Attorney Alert #5: Partnership Abandonment

When a partner decides to leave, it could trigger dissolution almost immediately, depending on the partnership agreement.

However, if the departing partner has not acted in the best interest of the partnership, it could be grounds for a lawsuit.

It may make sense to review the partnership agreement before resentment and business losses kick in. Often, a buy-out option is stated in well-drafted agreements and incorporation papers to lay the groundwork for a soft landing for all parties.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or