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SEC Chairman Confirms SEC Staff Analysis on ICOs and Digital Assets
Practical Law Legal Update w-019-4430 (Approx. 5 pages)
SEC Chairman Confirms SEC Staff Analysis on ICOs and Digital Assets
by Practical Law Corporate & Securities
| Published on 12 Mar 2019 • USA (National/Federal) |
In a response letter to a member of the US House of Representatives, SEC Chairman Jay Clayton confirmed SEC staff analysis that discussed whether a digital asset offered as a security can, over time, become something other than a security.
On March 7, 2019, SEC Chairman Jay Clayton, in a response letter to a member of the US House of Representatives, confirmed SEC staff analysis that discussed whether a digital asset offered as a security can, over time, become something other than a security.
The response letter followed the US Representative's fall 2018 letter seeking clarification on a June 2018 speech by Director of the SEC Division of Corporation Finance William Hinman, in which Director Hinman stated that, based on his understanding of Bitcoin and its network and the present state of Ether and the Ethereum network, none of the offers and resales of Bitcoin or offers and sales of Ether constitute securities transactions.
In the response letter, Chairman Clayton stated that he agreed with certain statements Director Hinman made in the speech concerning digital tokens. Specifically, Chairman Clayton agreed that:
- The analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument.
- A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition.
- A digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey test (see Practice Note, Security Defined).
Also, Chairman Clayton's response letter clarified the criteria used to determine when offers and sales of digital tokens should probably be considered investment contracts and therefore offerings of securities. Here, Chairman Clayton stated that:
- The SEC generally looks at whether the digital asset fits the definition of a security as set forth in the federal securities laws, such as the Securities Act and the Exchange Act.
- The SEC also applies tests developed through case law, such as the Howey test.
- He believes that the SEC has been transparent with the criteria used to determine whether a digital asset is offered or sold as an investment contract, through guidance from:
- the SEC's 2017 DAO Report (see Legal Update, SEC Issues Investigative Report Concluding Virtual Assets May Be Securities);
- Director Hinman's speech (see Legal Update, SEC Director, Division of Corporation Finance, Discusses ICOs and Digital Assets); and
- a November 2018 statement by the SEC Divisions of Corporation Finance, Investment Management, and Trading and Markets on digital issuance and trading (see Legal Update, SEC Issues Statement on Digital Asset Securities Issuance and Trading).
- He understands the desire for further dialogue on the subject, noting that the SEC website includes relevant public statements, speeches, and US congressional testimony by him along with SEC staff.
- SEC staff is also developing additional guidance designed to aid participants in determining whether a digital asset is offered or sold as a security.
Lastly, Chairman Clayton's response letter described the tools available to the SEC to offer more concrete guidance to aid innovators, including those in the distributed ledger technology space. Specifically, Chairman Clayton cited the SEC's:
- Formation of the Strategic Hub for Innovation and Financial Technology, or FinHub, in October 2018.
- Investor Bulletins warning of the risks of initial coin offerings (ICOs).
- Launch of a mock ICO website designed to attract potential investors and direct them to the SEC's educational materials, which the SEC has published on a spotlight page for ICOs and digital assets.
In concluding, Chairman Clayton stated that the SEC's efforts in this area have not been limited to enforcement actions, but when an enforcement action has been warranted, the SEC has acted swiftly to crack down on alleged fraudulent activity and protect investors.
For more information on ICOs and digital assets, see Blockchain Toolkit.
For more information on the SEC's recent statements and actions on ICOs, see Legal Update, SEC Settles First Self-Reported Unregistered ICO.