On April 3, 2019, the SEC Division of Corporation Finance (Division) issued a statement announcing that the SEC's Strategic Hub for Innovation and Financial Technology (FinHub) has published a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore is a security.

The framework is not intended to be an exhaustive overview of the law, but instead an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset. The framework also addresses the Staff's thoughts on whether a digital asset previously sold as a security should be reevaluated at the time of later offers or sales and may eventually no longer be a security.

Specifically, the information contained in this framework may apply to entities conducting the following activities related to digital assets:

Under the Howey test, an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be delivered from the efforts of others. In the framework the Staff focused on the third prong of the Howey test, reasonable expectation of profits, stating that the following characteristics were especially relevant in its analysis:

The framework represents Staff views and is not a rule, regulation, or statement of the SEC. The SEC has neither approved nor disapproved its content. Also, the framework is not binding on the Division or the SEC, does not constitute legal advice, and does not modify or replace any existing applicable laws, regulations, or rules.

The Staff recognizes that determining whether a new type of financial instrument, including a digital asset, is a security can require a careful analysis of the nature of the instrument and how it is offered and sold. If after applying the framework, market participants have questions regarding whether a particular digital asset is a security, they are encouraged to reach out to the Staff through FinHub's webform.

Also on April 3, 2019, the Division issued a response to a no-action request from TurnKey Jet, Inc., stating that the Division will not recommend enforcement action to the SEC if the digital assets described in the request, initial coin offering tokens, are offered or sold without registration under the Securities Act and the Exchange Act.

In reaching this position, the Division noted several conclusions, including:

For more information on ICOs and digital assets, see Practice Note, Security Defined and Blockchain Toolkit.

For more information on the SEC's recent statements and actions on ICOs, see Legal Update, SEC Chairman Confirms SEC Staff Analysis on ICOs and Digital Assets.