US SEC Publishes Framework For Investment Contract Analysis Of Digital Assets

News, Regulation | April 4, 2019 By:

The US Securities and Exchange Commission (SEC) has published a framework for analyzing whether a digital asset is offered and sold as an investment contract.

Called “Framework for ‘Investment Contract’ Analysis of Digital Assets,” the new framework is part of the agency’s continuing effort to assist companies seeking to comply with the US federal securities laws. It was co-signed by Bill Hinman, Director of Division of Corporation Finance, and Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation.

According to the SEC, the framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.

“If you are considering an Initial Coin Offering, sometimes referred to as an “ICO,” or otherwise engaging in the offer, sale, or distribution of a digital asset, you need to consider whether the US federal securities laws apply,” the SEC said. “A threshold issue is whether the digital asset is a “security” under those laws. The term “security” includes an “investment contract,” as well as other instruments such as stocks, bonds, and transferable shares. A digital asset should be analyzed to determine whether it has the characteristics of any product that meets the definition of “security” under the federal securities laws.”

The framework addresses each of the elements of the Howey test, a test established by the Supreme Court in Securities and Exchange Commission v. W. J. Howey Co. in 1946. It applies to entities conducting the following activities related to digital assets: offering, selling, or distributing, marketing or promoting, buying, selling or trading, facilitating exchanges, holding or storing, offering financial services such as management or advice
other professional services.

“Under the Howey test, an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” the SEC said. “Whether a particular digital asset at the time of its offer or sale satisfies the Howey test depends on the specific facts and circumstances.”

In June 2018, Hinman said that cryptocurrencies such as bitcoin and ethereum that are used strictly as currencies and are decentralized and not tied to an actual company are not securities. However, he said many tokens issued in ICOs are.