The U.S. Securities and Exchange Commission (SEC) released its crypto framework today, in which the agency published guidelines on which cases it considers tokens as securities.
Before diving in, it is important to note that while the SEC’s new guidance provides some legal clarity for crypto organizations, it should be seen only as a guideline since it is not a legally binding document.
The long-awaited guidelines
The framework, which was announced in November 2018 by SEC Director of Corporation Finance William Hinman that the agency was actively working on the document, guides token issuers whether their coins fall under a securities classification.
“Now staff guidance is staff guidance. The Commission can go ahead and bring enforcement actions anyway but staff guidance does carry a bit of weight, but I would like to do something more formal at the Commission level, so people have a little bit more certainty,” SEC Commissioner Hester Pierce stated about the framework.
The factors token issuers should consider
In the SEC’s new framework, token issuers can find several factors that they should consider when evaluating whether their coins are considered as securities (especially when they are planning to launch an ICO).
In the guidelines, the SEC detailed the different elements of the Howey test that evaluates whether an asset is considered as an investment contract. These factors include the investment of money, joint enterprise, and reasonable expectation of profits derived from the efforts of others.
In addition to the elements mentioned above, the SEC considers other factors in the evaluation process of tokens, including reliance on the efforts of others, the use cases of the tokens, the development of the network, the correlation between the token’s market and purchase price as well as several other elements.
The SEC’s framework also highlighted the factors token issuers should consider when they are evaluating coins that have been previously sold. The re-evaluation criteria include (the stronger the presence of the following factors, the less likely the Howey test is met):
- The distributed ledger network, as well as the digital asset, are fully developed and operational (there are already functions of the tokens users can utilize).
- The creation and structure of the token are aimed to meet the needs of the users rather than feed speculation.
- If billed as a currency, the token operates as a store of value
- Prospects for appreciation in the value of the digital asset are limited. E.g., the value of the digital asset will remain constant or degrade over time, so users won’t be expected to hold it for extended periods as an investment.
Criticism of the framework
While the SEC’s new crypto guidelines intended to provide more legal clarity for token issuers, critics of the framework have already arisen:
“The SEC promised guidance that would aid entrepreneurs in determining what tokens are securities, then published guidance saying ‘If it makes sense to use a token, it’s probably a security,’” Blockchain.com President and Chief Legal Officer Marco Santori tweeted.
“Oh, bummer. It just says ‘Here is a list of all of the things token sellers do. If you do the things on this list, the token might be a security’ Not as helpful as we’d hoped. Sorry for the sirens,” he continued.
While it seems that there are both upsides and downsides of the new framework, the SEC has made the life of token issuers at least a little bit easier, and we’re looking forward to seeing how it changes the crypto space.