SEC Staff Publish Long-Awaited Framework To Help Determine If Digital Assets Are Securities

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Staff at the U.S. Securities and Exchange Commission (SEC) has published a framework intended to help participants in the crypto market establish whether given digital assets are securities.

The framework is the work of SEC’s staff, and was published on Wednesday, April 3 under the title “Framework for ‘Investment Contract’ Analysis of Digital Assets.”

The two staff members who worked on the project are Bill Hinman, the director of the agency’s Division of Corporation Finance and “crypto czar” Valerie Szczepanik, SEC’s senior advisor for Digital Assets and Innovation.

An official statement released by the commission regarding the new framework, however, states that the content in the guidance does not constitute “a rule, regulation, or statement of the U.S. Commission.”  As such, the SEC hasn’t approved nor disapproved what is contained therein.

Additionally, the regulator’s statement urges that the framework does not provide legal advice.

Nonetheless, the document can be used as an analytical tool, one that token issuers and other initial coin offerings (ICO) participants can use to ascertain whether (or not) the particular digital assets are securities as defined under federal securities laws.

SEC’s statement, therefore, urges all market participants to undertake further review using stipulated rules and regulations as published on the Strategic Hub for Innovation and Financial Technology (FinHub) portal.

As for this particular framework, Hinman and Szczepanik have focused on what characterizes investment contract as securities, and not every other possible feature that could qualify an asset as a security.

The Howey Test, in place for over 70 years now, stipulates that an investment contract will be deemed to exist if it involves the purchase of an asset in a common enterprise, and where investors have a reasonable expectation of getting financial returns or profits from the efforts of others.

The framework thus outlines the above aspects of the Howey test as applied to digital assets, noting that other than money, it is typical to find the existence of a “common enterprise” when analyzing potential security tokens.

Per the document, an inquiry into a digital asset will focus on such criteria as the particular asset’s economic reality, and the commercial categorization of the instrument as contained “in the terms of the offer.”

It also focuses on the instrument’s distribution, and whether there are any other economic inducements put before prospective investors.

The framework will thus benefit anyone seeking to offer, sell, or distribute digital assets. Those engaged in marketing or otherwise promoting the said token, including financial service providers and exchanges, would also know whether, or not, the asset would qualify as securities.

The framework comes at a time when several people within the crypto industry, as well as lawmakers, have urged the SEC to offer a lot more regulatory clarity to help the ecosystem grow.

The Commission, on the other hand, has asked market participants to engage with its staff rather than waiting to be investigated or receive “no action letters.”


Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.

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