An Overview — SEC Division Releases Promised Guidance on ICO Tokens

Wilfred Michael 

Wilfred Michael

News reporter

03 April 2019,
21:19
An Overview — SEC Division Releases Promised Guidance on ICO Tokens

Wednesday, April 3, Bill Hinman, Director of Division of Corporation Finance and Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation at the U.S SEC announced the release of the regulator’s long-awaited guidance for crypto projects who want to issue ICO tokens.

As per the document, the guidance focuses on the different types of digital tokens and highlights specific cases where an ICO token falls under the SEC’s classification of securities. However, it is important to note that the guidance reflects views that SEC Chairman, Jay Clayton has expressed in the past with no significant alterations.

Factors To Consider in Determining Whether An ICO Token is a Security

As the U.S SEC has often stated in the past, the latest guidance relied on the 1933 Supreme Court Howey Case to define what factors to consider in figuring out whether an ICO token is a “security.”

Precisely, the guidance mentioned the following factors;

1.The Investment of Money

If the token in question was sold to the public” in exchange for value, whether in the form of real (or fiat) currency, another digital asset, or other types of consideration,” then it is worth weighing whether it is a security or not.

2.Common Enterprise

If the token in question is contains a common enterprise — a situation where the fortunes of the buyer are related with or dependent upon the efforts and success of the ICO project or their third parties — then it likely a security

3.Reasonable Expectation of Profits From Other People’s Efforts

After noting that the “profit expectation” tag is the main issue in the case of ICO tokens, the guidelines mentioned some cases where the prong is met:

  • When a promoter, sponsor, or another third party (or affiliated group of third parties) viewed as an "Active Participant" provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts.

  • The digital asset gives the holder rights to share in the enterprise's income or profits or to realize a gain from capital appreciation of the digital asset.

  • The potential profitability of the operations of the network, or the potential appreciation in the value of the digital asset, is emphasized in marketing or other promotional materials.

When a token is not likely to be considered a “security.”

As per the guidance, the presence of some of the following factors dramatically reduces the chances of a token falling into the category of securities. We reported some of these factors in the SEC’s recent decision to not consider an “enforcement action” against the TurnKey Jet token sale.

  • The distributed ledger network and digital asset are fully developed and operational, offering first-time token purchasers utility on the platform.

  • Prospects for appreciation in the value of the digital asset are limited. Preferably, tokens with a constant value or even the possibility of degradation will likely not be a “security.”

  • The digital assets' creation and structure are designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network.

Another crucial factor mentioned in the guidance are some factors that determine when a token no longer qualifies as security despite being so at the launch stage. These were in line with recently reported comments of SEC Chair, Jay Clayton:

  • Token buyers no longer reasonably expect that continued development efforts of the founding team will be a key factor for determining the value of the token.

  • Whether holders are then able to use the digital asset for its intended functionality such as paying for services on the network.

  • The trading volume for the digital asset corresponds to the level of demand for the good or service for which it may be exchanged

In a case where a startup wants to release the token as a virtual currency in the manner of Bitcoin, the guideline states fairly unattainable features such as:

  • It will be possible to pay for goods or services with the token without first having to convert it to another digital asset or real currency.

  • It can operate as a store of value that can be saved, retrieved, and exchanged for something of value at a later time.

Conclusively, the guidance noted that it doesn’t represent an official regulation for ICOs by the U.S SEC. Instead, the SEC’s Fintech Hub created it to help crypto startups know where they stand with regards to the securities law.

 

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