Stephen Palley, a partner at Anderson Kill, explains what the Securities and Exchange Commission's framework for digital assets means for ICOs. It does not constitute legal advice, for which you should consult with your own attorney. Link to the SEC press release (includes relevant links). As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub published a framework for analyzing whether a digital asset is a security. As others have said, the SEC’s Framework for “Investment Contract” Analysis of Digital Assets (the “Framework”) doesn’t offer a ton of new info, but still it feels like a step in the right direction. The Securities and Exchange Commission of Pakistan (SECP) is reportedly working towards introducing a regulatory framework for cryptocurrencies, according to a new document published this week. Here’s 6 pages on what the SEC guidance means! The authors of the Framework say that although courts view “common enterprise” as a distinct element of an “investment contract,” the SEC “does not view a ‘common enterprise’ as a distinct element of the term ‘investment contract.” The history of, justification for and sensibility of this view is outside the scope of this article. The Framework describes the factors used by SEC Staff for assessing whether digital assets are "investment contracts" subject to federal securities laws; the No Action letter applies those factors. What’s Striking About The Lightning Network? Those include: The Framework extinguished any remaining question about the SEC’s plans to allow the crypto space to remain an unregulated wild west. The U.S. Securities and Exchange Commission (SEC) has published a “Framework for “Investment Contract” Analysis of Digital Assets”, which outlines how the Commission may analyze whether a digital asset has the characteristics of one particular type of security.. A framework has been published with the accompanying statement from Bill Hinman, … By now, you’ve probably read (and read about) the SEC digital assets framework released yesterday. In the latter section it’s included as “[p]urchasers reasonably would expect that an AP’s efforts will result in capital appreciation of the digital asset.” I believe it belongs better in the “expectation of profits” section but its presence in the “efforts of others” section reminds us that this is all about [reasonable] purchaser expectation. Marketing that supports an expectation of profits also weighs in favor of purchaser expectation of profits. This reminds us that we’re interested in purchaser expectations. Ethereum 2.0 Development Update #16 — Prysmatic Labs, Bitcoin, Ethereum & Tether are leading the Crypto charge, 5 Solutions to Store and Secure Your Bitcoins Outside of Trading Platforms, Developing the network (including building the asset’s functionality, and managing the direction of the development), Controlling the creation and issuance of the asset, Playing a lead role in the confirmation of transactions on the network. Profits derived from the efforts of others can include appreciation of the asset and its sale at a gain in a secondary market — and this is often exactly what a digital-asset purchaser has in mind when participating in an ICO. SEC Offers Framework for “Investment Contract” Analysis of Digital Assets. ” Recognizing that “ Blockchain and distributed ledger technology can catalyze a … 1 Twitter 2 Facebook 3RSS 4YouTube SEC creates framework for analysis of digital assets. If the Ambrosus token is offered generally, versus being targeted for sale to companies likely to have a need for supply-chain management, that would weigh in favor of a determination that the sale of Ambrosus meets the “reasonable expectation of profits” element. Asset transferabililty and the managerial / development work done by core stakeholders will mean this. This is the “main issue,” the authors of the Framework point out. More specifically, the information contained in this framework may apply to entities conducting the following activities related to digital assets: This framework represents Staff views and is not a rule, regulation, or statement of the Commission. Stating that it … This framework, like other Staff guidance, is not binding on the Divisions or the Commission. This is something of a sticking point for some crypto advocates and attorneys, who are disappointed that the framework (a “nothingburger,” as attorney Preston Byrne put it) doesn’t give them much to rely on. 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 … By Securities and Exchange Commission April 8, 2019 by renholding. It's about the Staff's views, which are well-informed for sure, but not binding until the SEC … The SEC emphasized that this study focused exclusively on non-government or private crypto assets and not on Pakistan’s central bank digital currencies (CBDC). The framework is not intended to be an exhaustive overview of the law; rather, it is a tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale … are contributing to the regulatory framework for digital assets. Digital assets sold to meet the needs of users, rather than to “feed speculation” as to its value or development of its network. The author suggests that the Framework foretells a shift from Howey’s attempt to distinguish between investable assets that are, and are not, subject to federal securities regulation, to a more expansive concept that finds a security … ), The Framework here mainly focuses on factors that support a conclusion that purchasers would reasonably expect profits. 29 May 2019 9. 1. 5 Flickr 6LinkedIn 7 Pinterest 8 Email Updates, Framework for “Investment Contract” Analysis of Digital Assets, offering financial services such as management or advice. In particular, assets that currently can be redeemed for goods or services. 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 so, (2) are the ones who are expected to make efforts the right kind of “others” — are they APs? • In the U.S., many federal authorities are engaging. Digital assets meant to be “virtual currencies” that can be immediately used to make payments in a wide variety of contexts, including paying for goods and services without needing to convert the virtual currency to another currency. The SEC’s digital asset framework was written mostly by Director Hinman (made famous by his 'ether may not be a security' speech last summer) and Valerie Szczepanik (she heads up the SEC's digital asset division). Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation. What follows is an explanation of important parts of the Framework, and some analysis of its likely consequences for the classification of digital assets as securities under United States law. This sort of thing has already happened in the crypto space, as I recently discussed. If the reports are confirmed, Gensler’s appointment could signal stricter rules for digital asset exchanges and projects to curb some of the industry’s past excesses. Amid a flurry of calls for more clarity within the cryptospace, two leading SEC crypto experts released a document this week called the Framework for Investment Contract Analysis of Digital Assets. 3. This development is meaningful because it marks a shift away from the former uncertainty, which was likely a function of the SEC’s desire to promote innovation. In fact, it’s hard to imagine how a sale of a digital asset would not satisfy the “investment of money” element, and it therefore makes sense that, when facing a lawsuit or enforcement action, digital-asset developers often concede this point (see, for example, a court opinion from a lawsuit involving ATB Coin, where the defendants argued that ATB Coin was not a security, but conceded that the sale of the coins involved an “investment of money”). Profits can be, among other things, capital appreciation resulting from the development of the initial investment or business enterprise or a participation in earnings resulting from the use of purchasers' funds. An evaluation of the digital asset should also consider whether there is a reasonable expectation of profits. (In Howey, the citrus land and accompanying service agreement did constitute an investment contract.). Expectations about efforts of others: Within the “efforts of others” section, the Framework contemplates that when an AP retains a stake or interest in the asset, this supports a reasonable expectation by a purchaser that profits will be derived from an AP engaging in “efforts” like the ones listed above. It does not modify or replace any existing applicable laws, regulations, or rules. The important take-away is that those interested in whether digital-asset offers/sales constitute securities according to the SEC should primarily focus on the third element — expectation of profits derived from efforts of others. It merits more than a footnote to point out that the Framework “is not a statement of the [SEC];” does not constitute a rule or regulation; and, “like other staff guidance, is not binding” on the SEC. The new document is titled the “Framework for ‘Investment Contract’ Analysis of Digital Assets” and was compiled by Bill Hinman, director of the SEC’s Division of Corporation Finance, and Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation. I know that a lot of these findings ‘aren’t a surprise’ to securities law lawyers (or even just those who have paid attention to what's been coming out of the SEC in … As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub is publishing a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security. (5) Most digital assets (among those existing as of now, in early 2019) will be classified as securities.