framework for investment contract analysis of digital assets 1
(go back), 16We recognize that holders of digital assets may put forth some effort in the operations of the network, but those efforts do not negate the fact that the holders of digital assets are relying on the efforts of the AP. 8, 2004); see also the Commission’s Supplemental Brief at 14 in SEC v. Edwards, 540 U.S. 389 (2004) (on remand to the 11th Circuit). The framework was cobbled together by SEC Commissioners Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation aka “crypto czar” and Bill Hinman, director of the SEC’s Division of Corporation Finance. This can be demonstrated, for example, if the AP retains a stake or interest in the digital asset. Application of Howey to Digital Assets. An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example: Determining whether and how to compensate persons providing services to the network or to the entity or entities charged with oversight of the network. Amid a flurry of calls for more clarity within the cryptospace, two leading SEC crypto experts released a documen t this week called the Framework for Investment Contract Analysis of Digital Assets. The federal securities laws require all offers and sales of securities, including those involving a digital asset, to either be registered under its provisions or to qualify for an exemption from registration. On April 3, 2019 the US-SEC published a document entitled “Framework for “Investment Contract” Analysis of Digital Assets.” It is aimed at those who are consideringan Initial Coin Offering, sometimes referred to as an “ICO,” or otherwise engaging in the offer, sale, or distribution of a digital asset. In a so-called “airdrop,” a digital asset is distributed to holders of another digital asset, typically to promote its circulation. For example, the digital asset can only be used on the network and generally can be held or transferred only in amounts that correspond to a purchaser’s expected use. Playing a leading role in the validation or confirmation of transactions on the network, or in some other way having responsibility for the ongoing security of the network. These factors are not intended to be exhaustive in evaluating whether a digital asset is an investment contract or any other type of security, and no single factor is determinative; rather, we are providing them to assist those engaging in the offer, sale, or distribution of a digital asset, and their counsel, as they consider these issues. If the AP provides efforts that are “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,” and the AP is not merely performing ministerial or routine tasks, then there likely is an investment contract. Although no one of the following characteristics is necessarily determinative, the stronger their presence, the more likely it is that a purch… An AP has a lead or central role in the direction of the ongoing development of the network or the digital asset. See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Exchange Act Rel. The promise (implied or explicit) to build a business or operation as opposed to delivering currently available goods or services for use on an existing network. As noted above, under the Howey test, an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of … If the AP facilitates the creation of a secondary market, transfers of the digital asset may only be made by and among users of the platform. It is not an exhaustive treatment of the legal and regulatory issues relevant to conducting an analysis of whether a product is a security, including an investment contract analysis with respect to digital assets generally.  Price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered “profit” under the Howey test. hޤUmO�0�+�� �$q Uj��M�U$��ⵑҤJ����|vi (FinHub) attempted to provide some clarity by issuing a “Framework for ‘Investment Contract’ Analysis of Digital Assets,” which provides a toolkit to apply the Howey test to digital assets… (go back), 5SEC v. W.J. The digital assets’ creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network. This particularly would be the case where an AP promises further developmental efforts in order for the digital asset to attain or grow in value. 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