Two commissioners at the United States Securities and Exchange Commission (SEC) developed a framework to determine whether a digital asset is an investment contract. If it is determined to be so, it is a security.
The collaboration between Bill Hinman, director of Division of Corporation Finance of the SEC, and Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation of the SEC, resulted in Framework for Investment Contract Analysis of Digital Assets, which was published on April 3. The US Commission has not approved or disapproved the content of the publication. Rather, it acts as a guideline instead of a regulation or rule.
This framework isn’t designed to provide legal advice or to be an exhaustive look at digital assets, but it can assist operators of initial coin offers in analysis. They can better determine if their offerings will be subject to laws regarding federal securities. However, they should still consult with the formal rules and regulations which is part of FinHub or the Strategic Hub for Innovation and Financial Technology from the SEC.
Instead of looking at all the potential security classifications, the framework focused on investment contracts. It used the Howey Test, which is a 71-year old test to determine if investors may reasonably expect profits in a common enterprise. The framework looks at all aspects of the test, including the elements of a common enterprise and investment of money. According to the authors, they found that a common enterprise typically existed in digital assets.
More than six pages focused on one criteria, which is “a reasonable expectation of profits which are derived from the efforts of others.” They looked at the terms of the offer, how it was distributed and the economic inducements which were introduced to the prospect. The SEC has been called on in the past to create improved regulatory clarity for securities laws and blockchain-based tokens.