---
type: claim
domain: internet-finance
description: The Howey analysis dominates KB framing of futarchy-governed vehicles, but the Investment Company Act bites independently — beneficial-ownership under 17 CFR 240.13d-3 is broader than Howey's efforts-of-others prong, and survival depends on the vehicle's investment universe rather than its governance mechanism
confidence: experimental
source: "Rio structural analysis 2026-05-07 in response to m3ta vehicle-design questions, building on prior Howey claims and the SEC March 2026 token taxonomy framework"
created: 2026-05-07
attribution:
  extractor:
    - handle: "rio"
  sourcer:
    - handle: "m3taversal"
      context: "vehicle structural design questions routed through Leo, May 2026"
---

# 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

The Howey test asks whether a token sale is a securities transaction. The Investment Company Act asks whether the vehicle itself is a regulated investment company. These are independent statutes operating on different elements. A futarchy-governed vehicle can pass Howey — by decentralizing both analysis and decision through [[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]] — and still trigger ICA registration requirements that make the structure non-viable for retail access.

The KB's regulatory framing has been Howey-dominated. That framing is incomplete. The ICA is the gating constraint.

## Why the ICA reaches further than Howey

Section 3(a)(1) of the ICA defines an investment company as any issuer "engaged primarily in the business of investing, reinvesting, or trading in securities." A vehicle whose purpose is to deploy capital into investments via futarchy is by definition primarily engaged in that activity. The structural-separation argument that defeats Howey's efforts-of-others prong does not address whether the vehicle is an investment company — those are different questions.

The "beneficial owner" test under 17 CFR 240.13d-3 (Rule 13d-3) is the second independent constraint. Beneficial ownership reaches anyone who, "directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise" has voting power or investment power over the security. Token holders who participate in futarchy proposal markets have investment power — they are pricing whether capital deploys, on what terms, into which investments. That qualifies under the broad 13d-3 reading regardless of whether they reasonably expect profits from the efforts of others.

Howey defends against being characterized as a securities transaction. The ICA defends against being characterized as a registered investment company. Different doctrines, different elements, different defenses required.

## The three paths through ICA

The ICA has two principal exemptions for private funds and one structural escape for the underlying activity:

**Section 3(c)(1)** — fewer than 100 beneficial owners. Closes the open-distribution thesis. A futarchy-governed vehicle marketed for retail access cannot stay under 100 holders without abandoning the access proposition.

**Section 3(c)(7)** — all owners are qualified purchasers (≥$5M in investments for individuals; ≥$25M for institutional). Closes retail access entirely. The vehicle becomes a private fund for the wealthy, which contradicts the LivingIP thesis of [[Living Capital vehicles pair Living Agent domain expertise with futarchy-governed investment to direct capital toward crucial innovations]] reaching ordinary participants.

**Investment universe restriction** — the ICA only applies if the vehicle invests primarily in *securities*. If the underlying assets are not securities, the vehicle is not an investment company under 3(a)(1) regardless of holder count or qualification status. The SEC's March 2026 token taxonomy framework (see [[2026-03-17-sec-cftc-token-taxonomy-interpretation]]) created formal classifications for digital commodities and digital tools that are not securities. Tokens classified post-Transition-Point under the framework's investment contract termination doctrine are also not securities. A vehicle that invests in those asset classes is not primarily engaged in trading securities and falls outside ICA's scope.

The first two paths kill the access thesis. The third is the structural fit.

## Why investment universe is the gating decision

A futarchy-governed vehicle that wants both retail access and ICA-exempt status has exactly one viable path: invest only in non-security crypto assets. That includes:

- Digital commodities under the SEC/CFTC March 2026 framework (Bitcoin, Ether, and others classified outside the investment-contract framework)
- Ownership coins post-Transition-Point where the issuer's essential managerial efforts have been fulfilled or permanently ceased
- Governance tokens that the SEC framework treats as digital tools rather than investment contracts
- Tokens on platforms whose governance has decentralized sufficiently to terminate the original investment contract

Traditional private company equity is securities. SAFEs are securities. Equity rounds in startups are securities. A vehicle that deploys capital into any of these triggers ICA primary-business analysis and forces 3(c)(1) or 3(c)(7) gating.

This is the question that determines whether the vehicle structure survives or doesn't, and it sits upstream of every other design choice. The DAO LLC wrapper choice (see [[Ooki DAO proved that DAOs without legal wrappers face general partnership liability making entity structure a prerequisite for any futarchy-governed vehicle]]) doesn't address it. The futarchy mechanism doesn't address it. The fee-split structure doesn't address it. Only the investment-universe scope addresses it, and the choice is binary.

## Why the KB has under-weighted this

The Howey-focused framing was correct for evaluating whether token sales themselves are securities transactions, which is the question regulators have historically led with for crypto enforcement. But the LivingIP thesis is structurally distinct from a token launch — it is a *vehicle* that holds and deploys capital, marketed to retail. That activity profile triggers ICA scrutiny that ordinary token launches don't face.

The closest prior analysis in the KB is [[Permissioned launch curation creates implicit endorsement liability for futarchy platforms because each approval decision is evidence of gatekeeper responsibility that regulators can use to impose due diligence obligations]], which addresses platform-level liability but not vehicle-level investment company classification. The ICA gap has been load-bearing and unaddressed.

## The strongest counterarguments

**"Token holders aren't beneficial owners in the 13d-3 sense — they're depositors in a pool."** The counter: 13d-3 explicitly reaches "any contract, arrangement, understanding, relationship, or otherwise" that confers voting or investment power. Futarchy proposal markets confer investment power by design — that is the mechanism. A reading that excludes futarchy participants from beneficial ownership would also exclude every direct-vote DAO governance participant, which is not how the SEC has historically read the rule.

**"The futarchy mechanism is itself decentralized governance, so the vehicle isn't 'managed' in the ICA sense."** The counter: ICA Section 3(a)(1) doesn't require centralized management — it requires that the issuer be primarily engaged in investing, reinvesting, or trading securities. A pool that deploys capital into securities via market-based decisions is still primarily engaged in that activity. The decision mechanism doesn't change the activity classification.

**"Investment Company Act registration is achievable — just register."** The counter: registered investment companies (mutual funds, closed-end funds) face structural requirements (custody rules, board composition, valuation, disclosure cadence, redemption mechanics) that are incompatible with on-chain futarchy governance. The Investment Company Act and the Investment Advisers Act jointly assume human-controlled registered entities, which [[AI autonomously managing investment capital is regulatory terra incognita because the SEC framework assumes human-controlled registered entities deploy AI as tools]] flags directly. Registration is theoretically available and practically incompatible with the mechanism.

## What this means practically

Three operational conclusions:

1. **Howey is solvable. ICA is gating.** A clean Howey defense (open sourcing, structural separation, decentralized decision) doesn't get the vehicle past ICA. Both analyses are required and ICA failure is fatal where Howey failure is contestable.

2. **The investment-universe choice is upstream of every other design decision.** Vehicle wrapper, fee structure, governance schema, retail-access architecture all depend on whether the vehicle invests in securities or non-securities. The SEC's March 2026 framework created the non-security crypto path; the vehicle must commit to that scope to survive ICA at retail scale.

3. **Mixed-asset vehicles inherit the worst constraints.** A vehicle that wants flexibility to deploy into private company equity AND crypto-native assets is primarily engaged in trading securities under 3(a)(1) and faces ICA registration unless gated to qualified purchasers. The structural advantage of futarchy governance is preserved only if the investment universe stays clean.

This is regulatory analysis, not court-tested doctrine. The framing strengthens the existing Howey defense (by clarifying what it does and does not protect against) and identifies the binding constraint that determines whether the LivingIP vehicle thesis is viable for retail access.

---

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 Howey defense this claim complements
- [[Permissioned launch curation creates implicit endorsement liability for futarchy platforms because each approval decision is evidence of gatekeeper responsibility that regulators can use to impose due diligence obligations]] — the platform-level analogue at the curation layer
- [[AI autonomously managing investment capital is regulatory terra incognita because the SEC framework assumes human-controlled registered entities deploy AI as tools]] — why ICA registration is theoretically available and practically incompatible
- [[the SEC three-path safe harbor proposal creates the first formal capital formation framework for crypto that does not require securities registration]] — the framework that opens the non-security investment-universe path
- [[Ooki DAO proved that DAOs without legal wrappers face general partnership liability making entity structure a prerequisite for any futarchy-governed vehicle]] — the wrapper choice that sits below this question
- [[Living Capital vehicles pair Living Agent domain expertise with futarchy-governed investment to direct capital toward crucial innovations]] — the thesis whose retail-access viability depends on this analysis

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