---
type: analysis
domain: internet-finance
description: Three structural features of futarchy-governed entities compound to eliminate the concentrated promoter effort Howey requires — active market participation as governance, company non-control of treasury, absence of beneficial owners — though argument strength varies by project from Solomon (strongest) to Avici (weakest)
confidence: experimental
source: SEC Report on The DAO (2017), Howey test framework, MetaDAO ecosystem analysis, Seedplex regulatory analysis, March 2026
created: 2026-03-05
challenges:
- permissioned-futarchy-icos-are-securities-at-launch-regardless-of-governance-mechanism-because-team-effort-dominates-early-value-creation
related:
- the SECs treatment of staking rewards as service payments establishes that mechanical participation in network consensus is not an investment contract
- confidential computing reshapes defi mechanism design
- investment company act exposure not howey is the binding regulatory constraint on futarchy governed investment vehicles because beneficial ownership tests reach token holders even when the efforts of others prong fails
- open sourcing channels are a structural prerequisite for futarchy governed investment vehicles to clear the howey efforts of others prong because gatekept curation makes the curators judgment essential to investment outcomes
- futarchy-governed entities are structurally not securities because prediction market participation replaces the concentrated promoter effort that the Howey test requires
- the DAO Reports rejection of voting as active management is the central legal hurdle for futarchy because prediction market trading must prove fundamentally more meaningful than token voting
- futarchy-governed-ico-tokens-transition-from-securities-to-non-securities-through-mechanism-maturity-faster-than-token-voting-daos
reweave_edges:
- permissioned-futarchy-icos-are-securities-at-launch-regardless-of-governance-mechanism-because-team-effort-dominates-early-value-creation|challenges|2026-04-19
- the SECs treatment of staking rewards as service payments establishes that mechanical participation in network consensus is not an investment contract|related|2026-04-19
- confidential computing reshapes defi mechanism design|related|2026-04-28
- investment company act exposure not howey is the binding regulatory constraint on futarchy governed investment vehicles because beneficial ownership tests reach token holders even when the efforts of others prong fails|related|2026-05-08
- open sourcing channels are a structural prerequisite for futarchy governed investment vehicles to clear the howey efforts of others prong because gatekept curation makes the curators judgment essential to investment outcomes|related|2026-05-08
supports:
- The SEC-CFTC 2026 transaction-focused Howey analysis requiring essential managerial efforts to drive profits structurally supports futarchy's securities defense because market mechanisms replace concentrated promoter control
---

# futarchy-governed entities are structurally not securities because prediction market participation replaces the concentrated promoter effort that the Howey test requires

When a company raises capital through a futarchy-governed ICO on metaDAO, three structural features compound to eliminate the "efforts of others" that the Howey test requires for securities classification. This is the broader argument beyond the Living Capital-specific analysis.

## 1. Active participation through prediction markets

Since [[MetaDAOs Autocrat program implements futarchy through conditional token markets where proposals create parallel pass and fail universes settled by time-weighted average price over a three-day window]], every token holder participates in governance through the market mechanism. This is not a vote button — it is economic exposure to your governance beliefs.

- Trading conditional tokens puts capital at risk based on your assessment of proposals
- Holding through the TWAP window is itself a revealed preference (implicit approval at current terms)
- The mechanism is continuous, not discrete (three-day decision periods, not one-time votes)

Since MetaDAO empirical results show smaller participants gaining influence through futarchy, the mechanism provides genuine active participation, not just theoretical access.

## 2. Company does not control treasury

In a traditional raise, the team controls the capital. In a metaDAO ICO:
- The team proposes how to use treasury funds
- The market decides whether proposals pass through conditional token pricing
- If the market disagrees, the proposal fails and capital stays in the pool
- The team is effectively an employee of the market, not a promoter controlling outcomes

Since STAMP replaces SAFE plus token warrant by adding futarchy-governed treasury spending allowances that prevent the extraction problem that killed legacy ICOs, the treasury spending mechanism is structurally designed so teams cannot self-deal. Monthly spending caps, bid programs, and futarchy approval for any capital deployment.

## 3. No beneficial owners in the traditional sense

Traditional funds have GPs, boards, or managers who qualify as promoters. MetaDAO projects have:
- No GP making allocation decisions — the market mechanism does
- No board with fiduciary duty — the operating agreement binds to futarchy outcomes
- No promoter whose "concentrated efforts" drive returns — returns are a function of market-assessed decisions

Since [[futarchy-based fundraising creates regulatory separation because there are no beneficial owners and investment decisions emerge from market forces not centralized control]], no identifiable party fills the "promoter" role that Howey requires.

## Strength varies by project

**Strongest — Solomon Labs:** Since Solomon Labs takes the Marshall Islands DAO LLC path with the strongest futarchy binding language making governance outcomes legally binding and determinative, Solomon's operating agreement makes futarchy outcomes legally determinative. The company CANNOT override market decisions. The "efforts of others" prong fails cleanly.

**Strong — Ranger, Omnipair:** Since Ranger Finance demonstrates the standard Cayman SPC path through MetaDAO with dual-entity separation of token governance from operations across jurisdictions, operational execution matters, but strategic decisions are market-governed. The team executes; the market directs.

**Weakest — Avici:** Since Avici is a self-custodial crypto neobank with a secured credit card serving 48 countries that achieved the highest ATH ROI in the metaDAO ecosystem at 21x with zero team allocation at launch, the team's operational execution (building the card product, acquiring users) IS what drives value. The treasury is market-governed, but the business depends on concentrated team effort. The SEC could argue this is a security where the team's efforts drive profits, regardless of how treasury decisions are made.

## The "new structure" argument

This is genuinely a new structure the SEC has never encountered. The Hinman speech (2018) addressed network decentralization (Ethereum's node distribution). Futarchy is governance decentralization — a more specific, more verifiable claim. You can measure whether decision-making is concentrated: look at the distribution of conditional token trading during proposal periods.

**Political strategy:** Show the structure passes the existing Howey test first (prong 4 fails because of the three features above). Then build the longer-term argument that futarchy represents a new category of governance that existing frameworks don't capture. Lead with what works now, advocate for what should exist.

The SEC under Atkins (2025-2026) has signaled openness to new frameworks — the Crypto Task Force held roundtables on DeFi and tokenization, and Atkins stated tokens can become non-securities as "networks mature and issuers' roles fade." But the Ninth Circuit's SEC v. Barry confirmed the Howey test "remains the law." The window is open for advocacy, not for assumption that the rules don't apply.

## Remaining risks

Since [[the DAO Reports rejection of voting as active management is the central legal hurdle for futarchy because prediction market trading must prove fundamentally more meaningful than token voting]], the SEC could argue that prediction market participation is "just voting with extra steps." The counter: skin in the game, information aggregation (not preference expression), and continuous participation. But no court has evaluated this distinction.

The Investment Company Act adds a separate challenge: if the entity is "primarily engaged in investing" and has more than 100 beneficial owners, ICA registration may be required regardless of Howey. Whether futarchy participants count as "beneficial owners" under 17 CFR 240.13d-3 is untested. The strongest defense combines the "no beneficial owners" structural argument with 3(c)(1) or 3(c)(7) exemptions as backstop.

Since [[Ooki DAO proved that DAOs without legal wrappers face general partnership liability making entity structure a prerequisite for any futarchy-governed vehicle]], entity wrapping is non-negotiable regardless of the securities analysis. The Ooki precedent also creates a useful tension: if governance participation creates liability (Ooki), it should also constitute active management (defeating Howey prong 4).


### Additional Evidence (challenge)
*Source: 2026-02-00-prediction-market-jurisdiction-multi-state | Added: 2026-03-16*

The securities law question may be superseded by state gaming law enforcement. Even if futarchy-governed entities pass the Howey test, they may still face state gaming commission enforcement if courts uphold state authority over prediction markets. The Tennessee ruling's broad interpretation—that any 'occurrence of events' qualifies under CEA—would encompass futarchy governance proposals, but Nevada and Massachusetts courts rejected this interpretation. The regulatory viability of futarchy may depend on Supreme Court resolution of the circuit split, not just securities law analysis.


### Additional Evidence (challenge)
*Source: 2026-03-17-arizona-ag-criminal-charges-kalshi | Added: 2026-03-18*

Arizona's criminal charges against Kalshi demonstrate that being 'not a security' does not protect prediction market operators from criminal gambling prosecution. The structural separation that defeats Howey test classification is irrelevant to state gaming laws and election betting prohibitions. Criminal charges create personal liability for executives that persists regardless of securities law analysis.


### Additional Evidence (challenge)
*Source: 2026-03-12-cftc-advisory-anprm-prediction-markets | Added: 2026-03-18*

The CFTC's March 2026 ANPRM creates a parallel regulatory vector through the Commodity Exchange Act that could affect futarchy governance markets independently of securities law. If 'gaming' under CEA section 5c(c)(5)(C) is defined broadly, futarchy markets could face prohibition or restriction not because they're securities, but because they're classified as gaming contracts. This means proving futarchy entities aren't securities under Howey may be necessary but not sufficient for regulatory defensibility—they must also avoid the 'gaming' classification under the CEA.


### Additional Evidence (confirm)
*Source: 2026-03-17-sec-cftc-token-taxonomy-interpretation | Added: 2026-03-18*

The SEC's March 2026 Token Taxonomy interpretation strongly supports this claim's core logic through the investment contract termination doctrine. The framework formally recognizes that investment contract status terminates when the issuer's essential managerial efforts are fulfilled or abandoned — and the Transition Point mechanism creates a defined pathway for tokens to transition from SEC to CFTC jurisdiction once sufficiently decentralized. However, there is a nuance: the SEC's model focuses on when issuers CEASE managerial efforts (fulfillment/abandonment), while this claim argues futarchy STRUCTURALLY PREVENTS concentrated effort from existing. These are compatible but not identical — the SEC pathway may be more pragmatic for futarchy projects seeking regulatory clarity. The staking-as-service-payment precedent also strengthens the mechanical participation argument: if staking is service payment (not profit from others' efforts), prediction market trading is equally mechanical.


### Additional Evidence (extend)
*Source: [[2026-02-00-better-markets-prediction-markets-gambling]] | Added: 2026-03-18*

Better Markets' analysis of the CEA's gaming prohibition reveals that the 'legitimate commercial purpose' and 'independent financial significance' tests may be the parallel framework in derivatives law to the Howey test in securities law. Just as futarchy governance may avoid securities classification by eliminating concentrated promoter effort, it may avoid gaming classification by demonstrating genuine corporate governance function. The legal strategy is structurally similar: show that the mechanism serves a legitimate business purpose beyond speculation.


### Additional Evidence (extend)
*Source: [[2026-02-00-better-markets-prediction-markets-gambling]] | Added: 2026-03-19*

Better Markets' gaming prohibition argument reveals a complementary legal defense for futarchy: the 'legitimate commercial purpose' test. While the Howey securities analysis focuses on whether there are 'efforts of others,' the CEA gaming prohibition focuses on whether the contract serves a genuine hedging or commercial function. Futarchy governance markets may satisfy both tests simultaneously—they lack concentrated promoter effort (Howey) AND they serve legitimate corporate governance functions (CEA commercial purpose exception). This dual defense is stronger than either alone.


### Additional Evidence (challenge)
*Source: [[2026-03-19-wilmerhale-cftc-anprm-analysis]] | Added: 2026-03-19*

The CFTC's March 2026 ANPRM on prediction markets contains 40 questions focused entirely on sports/entertainment event contracts and DCM (Designated Contract Market) regulation, with zero questions about governance markets, DAO decision markets, or futarchy applications. This regulatory silence means futarchy governance mechanisms exist in an unaddressed gap: they are neither explicitly enabled by the CFTC framework (which focuses on centralized exchanges) nor restricted by it. The comment deadline of approximately April 30, 2026 represents the only near-term opportunity to proactively define the governance market category before the ANPRM process closes. WilmerHale's legal analysis, reflecting institutional legal guidance, does not mention governance/DAO/futarchy distinctions at all, suggesting the legal industry has not yet mapped this application. This creates a dual risk: (1) futarchy governance markets lack the safe harbor that DCM-regulated prediction markets may receive, and (2) the gaming classification vector that states are pursuing remains unaddressed at the federal level.


### Additional Evidence (challenge)
*Source: [[2026-03-19-clarity-act-gaming-preemption-gap]] | Added: 2026-03-20*

The CLARITY Act's Section 308 preempts state securities laws for digital commodities but explicitly does NOT preempt state gaming laws. This means even if CLARITY Act passes and resolves securities classification questions, states retain authority to classify prediction markets as gambling. The gaming classification risk persists regardless of securities law resolution, creating a dual-track regulatory threat where futarchy-governed entities could simultaneously avoid securities classification while facing state gaming enforcement. Arizona criminal charges and Nevada TRO demonstrate active state enforcement despite federal securities clarity.


### Additional Evidence (extend)
*Source: [[2026-03-22-cftc-anprm-40-questions-futarchy-comment-opportunity]] | Added: 2026-03-22*

The CFTC ANPRM creates a separate regulatory risk vector beyond securities classification: gaming/gambling classification under CEA Section 5c(c)(5)(C). The ANPRM's extensive treatment of the gaming distinction (Questions 13-22) asks what characteristics distinguish gaming from gambling and what role participant demographics play, but makes no mention of governance markets. This means futarchy governance markets face dual regulatory risk: even if the Howey defense holds against securities classification, the ANPRM silence creates default gaming classification risk unless stakeholders file comments distinguishing governance markets from sports/entertainment event contracts before April 30, 2026.


Relevant Notes:
- [[Living Capital vehicles likely fail the Howey test for securities classification because the structural separation of capital raise from investment decision eliminates the efforts of others prong]] — the Living Capital-specific version with the "slush fund" framing
- [[the SECs investment contract termination doctrine creates a formal regulatory off-ramp where crypto assets can transition from securities to commodities by demonstrating fulfilled promises or sufficient decentralization]] — the formal pathway supporting this claim
- [[the DAO Reports rejection of voting as active management is the central legal hurdle for futarchy because prediction market trading must prove fundamentally more meaningful than token voting]] — the strongest counterargument
- [[Ooki DAO proved that DAOs without legal wrappers face general partnership liability making entity structure a prerequisite for any futarchy-governed vehicle]] — why entity wrapping matters
- [[AI autonomously managing investment capital is regulatory terra incognita because the SEC framework assumes human-controlled registered entities deploy AI as tools]] — the separate AI adviser question
- [[decision markets make majority theft unprofitable through conditional token arbitrage]] — the minority protection mechanism that strengthens the governance argument
- legacy ICOs failed because team treasury control created extraction incentives that scaled with success — the failure mode that futarchy governance prevents

Topics:
- [[maps/living capital]]
- [[maps/internet finance and decision markets]]

## Supporting Evidence

**Source:** Ballard Spahr LLP analysis of SEC-CFTC joint interpretation, March 17, 2026

The March 2026 SEC-CFTC joint interpretation adopts a transaction-focused Howey analysis requiring 'essential managerial efforts' to drive profits. This regulatory framework directly supports the futarchy defensibility thesis by making the absence of concentrated promoter control the key test for avoiding securities classification.