The US Securities and Exchange Commission (SEC) has provided clarity on one of the most significant regulatory issues facing the cryptocurrency sector.
In a public statement, the SEC’s Bill Hinman and Valerie Szczepanik issued guidelines on how to determine whether a digital asset qualifies as a security under federal securities laws.
The guidelines
When the SEC posted the guidelines on Thursday (Australian time), cryptocurrency legal expert Katherine Wu tweeted “this is huge!”
???? THIS IS HUGE: the SEC just released an official statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets” analyzing whether a digital asset is a security or not
READING NOW WILL POST ANALYSIS HERE STAY TUNED
— Katherine Wu (@katherineykwu) April 3, 2019
The framework is outlined in a lengthy document that mostly looks at how to apply the so-called ‘Howey Test’ to decide whether a digital asset has any characteristics of an ‘investment contract’ and is therefore a security.
The US Supreme Court’s ‘Howey’ case found that 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 says the focus of the ‘Howey’ analysis is not only on the digital asset itself, but also on the manner in which it is offered, sold, or resold.
No simple answer
The SEC says the framework is a guide only and that investors and companies should engage a lawyer for legal advice.
“This framework represents staff views and is not a rule, regulation,” the statement said.
“The Commission has neither approved nor disapproved its content (and it) is not binding on the Divisions or the Commission.”
The SEC says that if market participants still have questions after applying the framework, the should reach out to staff through FinHub’s webform.
Cryptocurrency business in the clear
The release of the framework came as the SEC’s Division of Corporate Finance recommended no action be taken against cryptocurrency business TurnKey Jet, which was using a token-model for its all-inclusive private jet offering.
The division released a statement which said that the “tokens are not securities” and outlined reasons why.
“(The company) will not use any funds from Token sales to develop (its) platform, network, or app, and each of these will be fully developed and operational at the time any tokens are sold,” the division said.
“The Tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold.”
