2018 was all buzz about US SEC and its considerations of blockchain and cryptocurrencies, but nothing actually materialized nor there was any clarity on what the regulator looking at. But finally, the air has been cleared as SEC has released a Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets”
SEC explains how Howey test should apply to digital assets
Finally, the US regulator for securities and exchanges, the SEC, has issued its first ever letter that provides an insight to companies that are considering token offering for raising capital or thinking of an ICO.
The first of its kind “No-Action Letter,” was received by the company called TurnKey Jets(TKJ), which is a startup that offers an all-inclusive private jet service including the plane crew, and pilot. Interestingly, the company’s website has no mention of a crypto-token, which appears to play a role in the actual reservation of the services. The no-action letter includes six key points as specifically relates to TurnKey Jets giving the world the points which is considered to reach this decision. To quote from the letter
- TKJ will not use any funds from Token sales to develop the TKJ Platform, Network, or App, and each of these will be fully developed and operational at the time any Tokens are sold;
- The Tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold;
- TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform;
- TKJ will sell Tokens at a price of one USD per Token throughout the life of the Program, and each Token will represent a TKJ obligation to supply air charter services at a value of one USD per Token;
- If TKJ offers to repurchase Tokens, it will only do so at a discount to the face value of the Tokens (one USD per Token) that the holder seeks to resell to TKJ unless a court within the United States orders TKJ to liquidate the Tokens; and
- The Token is marketed in a manner that emphasizes the functionality of the Token, and not the potential for the increase in the market value of the Token.
Along with the no-action letter, SEC has also released a document called “Framework for “Investment Contract” Analysis of Digital Assets,” where it lays out a detailed explanation of how the existing Howey Test used to determine what is security is being applied to digital assets issued on a blockchain. The vast majority of the document details how the SEC views what is considered a reasonable expectation that profits will be derived from the efforts of others, a crucial factor of the test.
The most interesting section begins on page nine, with 12 characteristics that if present, mean the token offering is less likely to pass the Howey test. The first two are crucial.
“The distributed ledger network and digital asset are fully developed and operational,” and “holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use.”
While there are still some gaps to be filled, the efforts of the SEC were well appreciated by the community. According to Jake Chervinsky, the lawyer who has been keeping an eye on legal and regulatory movement around cryptocurrencies tweeted saying
“The SEC published its DLT Framework today, giving us an in-depth look into how they think the Howey test should apply to digital assets. It isn’t perfect, but it is a *huge* upgrade from the DAO Report. I’ll throw some shade at the SEC later today, but for now, I give them 👍👍.”
The community has given its thumbs up to SEC which has finally broken its silence. There is a sense of optimism already that SEC may now move a bit quicker with decision-related to cryptocurrencies.
What is your view on SEC’s Framework for “Investment Contract” Analysis of Digital Assets? Do let us know your views on the same.
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Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Follow him on Twitter at @KoinKing1 or connect with me on linkedin.