The United States Securities and Exchange Commission (SEC) has published a new statement aimed at guiding initial coin offering (ICO) participants in determining whether tokens are indeed subject to U.S. federal securities laws.
The document, entitled “Framework for ‘Investment Contract’ Analysis of Digital Assets,” is the first clarification of the SEC’s tentative views toward cryptocurrency tokens since the Commission outlined its inaugural positions on crypto in its July 2017 DAO report.
Still, uncertainty abounded after that initial report, as Americans still lacked definitive and comprehensive legal guidance on whether cryptocurrencies were commodities, securities, property, all of the above, or a new class of assets entirely.
The new framework, authored by SEC directors William Hinman and Valerie Szczepanik, is still far short of a comprehensive legal clarification as it’s non-binding and represents staff views. Hinman himself made waves last year in expressing his view that ether (ETH) wasn’t a security. However, the framework provides “additional guidance” on what the SEC’s digital asset specialists consider to be the law of the land for tokens in the U.S.
22/ IN CONCLUSION, the framework is definitely a cumulation of the cautionary lessons that we've learned from the SEC's past enforcement actions (don't shill your token $ value, actually develop a usable token, have a real plan to decentralize out your team, etc).
— Katherine Wu (@katherineykwu) April 3, 2019
To that end, the report delved into deeper detail on how the Commission approaches the Howey Test, or the standards used to determine if an asset is a security in America, when it comes to token projects. Namely, if such a project launched an ICO for money and relies on a single centralized development team, it’s likely a security.
The Commission’s report also noted that token purchasers having a “a reasonable expectation of profits to be derived from the efforts of others” was another factor that pushed tokens toward being securities under U.S. law.
The clarifications aren’t altogether surprising in the context of past SEC actions, but they could lead to more cryptocurrency enterprises feeling comfortable opening up shop in America going forward.
0/ Yes, I may write more, but I mostly agree with @MattCorva. The SEC's rules still aren't as clear as places like Singapore, UK, and France, but I'm hopeful this will still give law firms, projects, investors, and customers sufficient clarity to start doing business again. https://t.co/y6wlC19BiM
— Patrick Berarducci (@PatBerarducci) April 3, 2019
SEC Also Issues No-Action Letter on Token Project, A First
The day before it released its latest crypto statement, the Commission issued its first “no-action letter” to a cryptocurrency project.
Non refundable tokens that act like a coupon for prepaid on-demand air charter services are not a security, SEC says in no action letter response (based on details provided by counsel in letter). https://t.co/hzeQO3N1aJ
— Palley (@stephendpalley) April 3, 2019
That project was TurnKey Jet, a small airline that developed the TKJ token as a coupon-like asset meant to be exchanged for flights. The SEC’s letter determined that the regulator wouldn’t be taking any enforcement action against TKJ, as the token didn’t meet their definition of a security:
“Rather, the interest represented by a Token will be a consumptive right to redeem the escrowed funds to pay for air charter services. As such, neither an ‘investment contract,’ a ‘note,’ an ‘evidence of indebtedness’ or another form of security is present. There is no reasonable expectation of profit derived from the efforts of others, and the Consumer’s expectation will be to enter into a consumer transaction for prepayment of air charter services.”
The letter gives a glimmer of hope to crypto bills currently advancing in several U.S. state legislatures that would separate security tokens from utility tokens via formal definitions.
FIRST EVER no-action letter by the SEC on a #crypto token — that's big news. #Wyoming's trail-blazing #utilitytoken law is looking quite good when viewed against new SEC guidance, & states that copied it (#Colorado+8 others in process) look SMAAAAAAART!!!https://t.co/L14QycEedZ
— Caitlin Long 🔑 (@CaitlinLong_) April 3, 2019
SEC Is On the Lookout for a Cryptocurrency Expert
A fresh listing on a government jobs site indicates the Commission is looking to hire a “Crypto Specialist” who can coordinate the “Division of Trading and Market’s activities regarding crypto and digital asset securities” at the watchdog.
It’s just another development that highlights how the fledgling cryptoeconomy is steadily becoming a larger and more serious point of focus for America’s top securities regulator.
And, as the SEC’s crypto activities have ramped up in the past few years, the Commission’s prospective hire for its new Crypto Specialist position would presumably have no shortage of regulating to immediately dive into — it’s currently believed that the SEC has a substantial backlog of work related to cryptocurrencies on its books.