April 3, 2019, marked two “firsts” for the SEC as they simultaneously released:
Together, these two actions begin to clarify how digital assets are, or are not, viewed in the eyes of the SEC.
Rather than reinvent existing U.S. securities laws, the SEC’s framework re-emphasizes the longstanding application of the Howey test to analyze whether a digital asset has the characteristics of an investment contract, and would therefore constitute a security. Under Howey, an investment contract exists when (a) money is invested in a (b) common enterprise with a (c) reasonable expectation of profits to be derived from the efforts of others.
Typically, most ICOs will meet the first two parts of the Howey test: an investment of money in a common enterprise. Most of the gray area in the analysis lies in evaluating the nuances of the ICO to determine whether or not there is a reasonable expectation of profits derived from the efforts of others. To aid in making this determination, the framework sets forth a variety of characteristics to consider, including, for example:
By applying the framework to examine each component of the Howey test, it is expected the majority of ICOs will be considered securities. This is further underscored by the no-action letter related to TurnKey Jet’s tokens, which details an extremely narrow use case in applying the framework to conclude an ICO does not represent a security offering.
While the industry has long awaited regulatory clarity from the SEC on digital assets, even with these recent developments what remains clear is that there is still a long way to go as this asset class continues to evolve.
Contact Corey McLaughlin at email@example.com or a member of your service team for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
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