The United States Securities and Exchanges Commission [SEC] released guidance with regard to analyzing which tokens could be classified as a security, a much-anticipated step from the commission. The framework was released on 3 April 2019, along with an official statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets.”
On on hand, the statement clearly stated that the framework “represents” only the view of the staff, and that it should not be considered as a rule, regulation or statement by the commission. Further, the commission suggested that the “information” in the framework could relate to organizations that are involved in selling or distributing digital assets, marketing coins, and providing facilities such as management, storing, exchange and others.
On the other hand, the framework gave a deeper insight into the laws and factors that should be considered while planning an Initial Coin Offering [ICO], especially with respect to checking whether a particular token satisfied the Howey Test or not. The guidance document stated,
“If you are considering an Initial Coin Offering, sometimes referred to as an “ICO” or otherwise engaging in the offer, sale or distribution of a digital asset, you need to consider whether the U.S. federal securities laws apply. A threshold issue is whether the digital asset is a “security” under those laws.”
The framework placed special emphasis on the Howey Test, stating that this “applies to any contract, scheme or transaction,” irrespective of its characteristics. It also stated that the test focuses on the “circumstances surrounding the digital asset,” and the process of its sale or offering.
The report read,
“[…] under the Howey test, an “investment contract” exists when there is the investment of money in a common enterprise with reasonable expectation of profits to be derived from the efforts of others. Whether a particular digital asset at the time of its offer or sale satisfies the Howey test depends on the specific facts and circumstances.”
This was followed by the commission explaining the application of the Howey Test, which includes three important factors. These factors are, whether the asset is an investment of money, whether a common enterprise exists, and the expectation of profits from the work completed by a group or organization. The commission highlighted expectation of profits and reliance on other efforts, claiming that these factors “are especially relevant in the analysis of whether the third prong of the Howey Test is satisfied.”
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