The US Securities and Exchange Commission has newly updated guidance for crypto token issuers, explaining how and when cryptocurrencies can fall under the securities classification through the US federal securities laws.
What Makes a Crypto Token a Security?
At its simplest, if a digital asset is offered and sold as an investment contract, it is considered a security. Market participants who offer, sell or distribute digital assets, market or promote, buy, sell or trade, facilitate exchanges, hold or store digital assets, offer financial services, or offer other professional services related to digital assets are under the jurisdiction of the SEC.
The framework itself goes into more detail, analyzing the Howey test. This test determines that an investment contract exists when there is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others, even if that investment of money comes in the form of cryptocurrency or if the investment is made in digital assets. Note that this framework represents the SEC staff’s views and is not a rule, regulation, or statement of the SEC. And although the Commission has neither approved nor disapproved of its content, it brings clarity to the market participants.
Under federal law, offers and sales of securities have to be registered under the securities laws or qualify for an exemption. The framework breaks down the definition of an investment contract and outlines the additional considerations in evaluating whether a digital asset previously sold as a security should be reevaluated at the time of later offers or sales. As security token offerings are poised to overtake initial coin offerings, it’s a situation companies and investors in the market need to keep an eye on.
SEC to Hire a Crypto-Specialist
As cryptocurrency and its impact on the market is not going away anytime soon, the SEC’s Division of Trading and Markets is looking to hire a new legal expert to develop a comprehensive plan to address crypto tokens and other digital asset securities issues. This crypto-specialist will provide expert level policy comment and will be poised to help the SEC illuminate the gray area of digital assets and investment.
What does this mean for businesses? We believe it’s a clear sign that regulations for crypto token issuers will be more clearly spelled out, which means organizations have to be ready to take the right steps to register securities or find an exemption.
To learn more about possible exemptions, visit www.verifyinvestor.com.