Digital Asset Is a Security
The U.S. Securities and Exchange Commission (SEC) has published a “Framework for “Investment Contract” Analysis of Digital Assets”, which outlines how the Commission may analyze whether a digital asset has the characteristics of one particular type of security.
A framework has been published with the accompanying statement from Bill Hinman, Director of Division of Corporation Finance, and Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation, who is also leading SEC’s FinHub.
In the statement, Hinman, and Szczepanik state that the framework is designed and published “as part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws”. They emphasize that the document is not intended to be a comprehensive overview of the law itself, but rather an analytical tool to assist those seeking to comply with laws.
Moreover, the SEC emphasizes that the published framework doesn’t represent a “rule, regulation, or statement of the Commission,” hence, it’s not a legally binding document, but rather reflects the views of its staff.
The Framework explains how the Howey Test, originally created by the Supreme Court for determining whether certain transactions can be seen as investment contracts, is applied to digital assets issued on a blockchain. To this end, the document identifies 11 characteristics that, if found, would provide the token sale with fewer chances to pass the Howey test, although it emphasizes that none of them is “necessarily determinative”.
Out of relevant characteristics, two stand out from the rest.
- The distributed ledger network and digital asset are fully developed and operational.
- Holders of the digital asset are immediately able to use it for its intended functionality
on the network, particularly where there are built-in incentives to encourage such use.
With the first two features seen above, SEC sends a clear message that the token has to be backed by a fully developed and operational product and two, must be ready for use immediately.
These two traits are in line with the first ever letter issued yesterday by FinHub to TurnKey Jets, where the Commission doesn’t recommend action against the startup as long as it fully develops its platform and allows owners of tokens to purchase the company’s services immediately.
The framework concludes that “digital assets with these types of use or consumption characteristics are less likely to be investment contracts”, and it advises market participants to seek advice of SEC staff through FinHub.