Leaseum Partners takes the Howey Test

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Leaseum Partners

6 min readSep 17, 2018

The Howey Test was established by the US Supreme Court in 1946 as a simple method of determining whether or not certain agreements are considered “investment contracts,” and therefore subject to US securities law. Over seventy years later, the SEC continues to utilize the Howey Test as their primary evaluation method.

With the recent ICO boom, regulators have once again turned to the Howey Test to analyze whether or not some of the “tokens” associated with these offerings are actually securities. For example, the SEC conducted an investigation into the DAO token and on 25 July 2017, they released a report stating that the DAO project is indeed selling an “investment contract,” recognizing DAO tokens as securities.

The report evaluated the main characteristics of the DAO project — a German-designed network of smart contracts where token holders had voting rights over determining how the funds were invested — and then applied the Howey Test.

They argued that because investors of the project contributed Ethereum tokens, it was an investment of money. The investors of the project all contributed to a common enterprise with the expectation of profits from the contracts and the investment decisions that were to be made. Consequently, the token holders were only voting on investment decisions, while the decisions themselves were executed solely by the efforts of others.

There continues to be an ongoing debate over whether some tokens are to be considered securities because of their undeniable utility function(s) within the decentralized system. Therefore, in order to properly forecast the potential outcome of such an evaluation, we will be applying the Howey test to Leaseum tokens in a fully objective manner.

Investment of money ✓

This component of the Howey test applies to the majority of projects that have conducted an ICO at any point in time, which includes Leaseum Partners. Indeed, we will be accepting investments of money in either fiat or cryptocurrencies during the Security Token Offering (STO) period.

The STO is open to qualified and accredited investors in the U.S. and internationally. All investors are required to pass the necessary KYC/AML restrictions in order to participate.

In a common enterprise ✓

A common enterprise is generally defined as a mutually beneficial agreement between separate entities, but this agreement or “commonality” can differ in various situations, which has led to disagreements within the federal district courts of appeal on this component of the Howey test. Essentially, there are two main varieties of a common enterprise:

Horizontal commonality — Investor contributions are pooled and the success of the overall venture determines the profit (investor-to-investor).
Vertical commonality — Investor contributions are pooled by a “promoter” or agency with expertise in the field and ROIs are dependent upon the promoter’s efforts (investor-to-promoter).

Leaseum Partners will be acquiring and managing the real estate properties associated with the fund. Because our investors’ ROI, as well as our organization’s, is partially dependent upon our organization’s performance in our decision making and execution processes, we consider our common enterprise be that of vertical commonality.

With an expectation of profits ✓

Those who contribute to our fund do so with the expectation that the NAV (Net Asset Value) will appreciate by the time fund maturity is reached, after 10 years. In addition, token holders also expect to receive quarterly dividend payments generated through rental income distribution.

In short, those who invest in our fund expect to profit in a form of rental income and capital appreciation.

Solely on the efforts of others ✓

Leaseum Partners makes it simple to invest in commercial properties in New York City — a highly desirable asset class. However, investors do not have power over which properties are acquired under the fund — they are relying solely on the efforts and expertise of our organization.

The main function of the Leaseum token is to serve as a digital representation of fractional ownership of our real estate fund. In addition, Leaseum uses the tokens for dividend distribution, token redemption, and voting rights in the event of an early fund termination.

David Dahan, our Chief Investment Officer, has over 25 years of experience in the industry having served as Head of Listed Real Estate Securities at Aviva Investors and a member of the Real Estate Executive Committee.

Michael Chetrit, of the Chetrit Organization, is our portfolio manager. The Chetrit Organization is one of the most recognizable names in the American Real Estate market and has held, developed and managed some of the most iconic buildings in the US.

Conclusion

When conducting the Howey test on ICO projects, the main obstacle encountered is how some tokens present a valid utility function within the network. Because our tokens lack a utility function, we anticipate that the SEC will consider them to be “investment contracts” subject to US securities law.

We have prepared ourselves for this, as we plan on maintaining full compliance with all existing securities laws. We will also be utilizing the high-quality security token platform tokeny offers to manage the Leaseum tokens.

Moreover, the Leaseum Token STO will be limited to accredited investors within the meaning of Rule 501(a) of “Regulation D, 506(c)” of the Securities Act 1933 under U.S. law for US investors or “Regulation S” and any equivalent qualification under local laws for non-US investors.

About Leaseum Partners

Leaseum Partners is utilizing blockchain technology to disrupt traditional processes associated with investing in Commercial Real Estate by providing token holders with dividends, voting rights, and capital gains rights.

If you are interested in learning more about Leaseum Partners, our light paper is available to subscribers on our website.

In the meantime, stay updated on our progress:

Disclaimer:

This article is given for information purposes only and no part of it is legally binding or enforceable, nor is it meant to be. Whilst we believe that the information provided in this article is reliable, its accuracy is not guaranteed and no warranty is given or implied. Certain statements contained in this article constitute forward-looking information involving known and unknown risks and uncertainties, which may cause actual events to differ materially from the estimates implied or expressed in such forward-looking statements. More information about the ICO is available at https://www.leaseumpartners.com

None of the information in this article is intended to provide a basis for an investment decision, and no specific investment recommendation is made. Accordingly, nothing in this article shall be deemed to constitute a prospectus of any sort or a solicitation for investment, nor does it in any way pertain to an offer to sell or a solicitation of an offer to buy any securities or rights of any nature whatsoever in any jurisdiction.

The ICO is not intended for jurisdiction where sale or use of digital crypto-assets may be prohibited. Moreover, the ICO, if launched, will be limited to accredited investors within the meaning of Rule 501(a) of “Regulation D” of the Securities Act 1933 under U.S. law or any equivalent qualification under local laws. You are strongly advised to carry out a legal and tax analysis concerning the participation to the ICO according to your nationality and place of residence.

This article shall not be copied, reproduced, disseminated or disclosed in any way in whole or in parts, nor shall it be distributed to a “U.S. Person” within the meaning of Section 902(k) of “Regulation S” of the Securities Act 1933 under U.S. law.