Nevertheless, financial regulators are already developing the first legislative acts that will help make this market more stable and secure. In April 2019, the U.S. Securities and Exchange Commission (SEC) published a detailed guide with which market participants will be able to determine whether the sale or placement of a digital asset is a securities transaction. So, let's talk about everything in order.
SEC Knowledge Base
Specialists of the strategic center for innovation and financial technology (FinHub), which operates under the supervision of the SEC, have published a rather voluminous analytical knowledge base. Based on these data, one can understand whether a particular token is suitable for the category “securities”. This is important to know in order to understand whether an asset is subject to regulation in accordance with US federal securities laws.
Together with this guide, on the same day, specialists in the corporate finance division published an interesting letter . It refers to digital assets that are not subject to registration and seizure in accordance with the Securities Act of 1933 and the Exchange Act of 1934.
It is worth noting that this letter in tandem with the framework program indicates that the regulatory framework in the field of blockchain technologies and the digital economy in the United States is beginning to change. It seems that employees of the main regulatory body of the United States are ready to refuse to register some types of digital assets as securities.
Of course, this can be called a “thaw” for the industry, but by and large what is happening applies only to a limited number of blockchain projects. But we decided to disclose this topic to our readers anyway - the restrictions imposed by the SEC will inevitably affect the entire blockchain industry as a whole, and the commission’s leadership must be able to understand and read correctly.
What is a framework program?
To begin with, we recall that in November 2018, the head of the corporate finance division, William Hinman, announced that his department was going to issue a guide that would be written in a clear and simple language. The new development of the FinHub division is a rather useful analytical tool with which you can evaluate the applicability of federal securities laws to the sale or placement of a specific digital asset.
In this program, employees explain their own views on how the analysis of an investment contract should affect operations with digital assets. This analysis was first formulated in the SEC v. WJ Howey Co in 1964, which was reviewed by the US Supreme Court. At that time, a peculiar formula was developed (the so-called Howie test), according to which the investment contract could be interpreted. In order for any action to be recognized as a transaction with securities, it is necessary to comply with three criteria:
- Investing money.
- Funds should be invested in a common enterprise.
- After this, investors should expect a reasonable amount of profit.
In order for the regulator to acknowledge the fact of concluding an investment contract, and therefore, the operation with securities, it is necessary that all three of the above points from the Howie formula are observed. Based on this, we can conclude that, as a rule, the placement of digital assets for the most part falls under only the first two points, while compliance with the third is a decisive argument in deciding on the nature of these assets.
Money investment
It is important to understand that the principles that the framework program reflects are quite clearly enshrined in case law. It says that the Howie test is not only applicable to funds provided by the state, that is, the national currency. All other forms of monetary expression, including cryptocurrencies ( BTC , ETH , XRP , etc.), as well as non-monetary remuneration (advertising services for the issuer, various "bounty programs", etc.) also fall within this definition.
General enterprise
Regarding the second paragraph of the Howie test, the framework program says that 1) investments in digital assets, as a rule, imply a common enterprise and 2) the Securities and Exchange Commission does not consider a common enterprise as a separate element of an investment contract.
Reasonable expectation of profit
In order to understand whether this or that action falls under this paragraph, it is necessary to compare a number of factors:
- A digital asset gives its owner the right to a part of the company's income or to profit from the increase in the total capitalization of the enterprise.
- A digital asset can be sold or transferred to the secondary market, or it is assumed that such an opportunity will become available in the future.
It is worth noting that the framework program implies that if investors are additionally motivated to use a digital asset (as payment for services or goods), this reduces the likelihood of its compliance with this clause.
In addition, the analysis framework determines additional nuances that must be considered when determining whether a digital asset is placed for sale for consumption or use by customers:
- Owners have the opportunity at any time to use the digital asset for its intended purpose (sell, transfer, pay them anything).
- The development and implementation of the structure of digital assets takes into account the needs and requirements of users.
- Growth prospects for digital assets should be limited.
Other parties' efforts
As you know, one of the key features of digital assets is their decentralization. That is why it is hard enough to understand whether benefits will be derived from other parties and, importantly, how broadly it is necessary to interpret the very concept of “other parties”. In this regard, the following is noted in the framework program:
If a promoter, sponsor, third party or affiliate group of third parties (each of which is an “active participant” or “AU”) makes important managerial efforts that influence the success of the enterprise, and investors reasonably expect to profit from these efforts, this implies compliance the third paragraph of Howie's test.In addition, this analytical tool provides for a number of factors by which it is possible to determine the presence of the element “efforts of other parties”. Let's take a closer look at them:
- Active network members must fulfill a number of important management tasks and responsibilities. This should not fall on the shoulders of a non-affiliated, fragmented community.
- Active participants must maintain the liquidity of the digital asset.
- Active participants play a key role in the development of a particular blockchain network or digital asset.
That is, based on the foregoing, it can be concluded that although none of the points is determining, all the same, the more significant their presence, the more likely the final buyer will be forced to rely on the efforts of other parties.
Flexibility
It is important to understand that representatives of the SEC corporate finance division drew attention to the fact that this program is not a constant. This means that over time, its rules may change, given the methods of using, placing and selling a particular digital asset. In addition, the framework program includes clauses that provide for the revision of the status of a digital asset. For example, it was previously placed as a security, since it corresponded to all three points of the Howie test, but in the future it may lose this status for several reasons.
TurnKey Jet Failure Letter
This letter clearly describes how to place and sell a digital asset without the need for its registration in accordance with the Law on “Securities of 1933”.
So, TurnKey Jet is a charter airline, the specialists of which have developed a special platform for their customers where you can buy the TKJ branded token. Subsequently, using this digital asset, you can purchase tickets for the company's charter flights.
- The TKJ token exchange rate is unchanged and is always equal to 1 US dollar.
- Emission - without limits.
- The transfer of rights to tokens is carried out exclusively within the framework of the company's platform.
- For TKJ tokens, only company services can be purchased.
TKJ experts believe that the introduction of a digital asset will contribute to faster payment processing, and therefore improve the quality of services.
Before deciding not to take action, FinHub experts pay close attention to several factors. These features distinguish the placement of the TKJ token from those digital assets that are placed as investment contracts.
FinHub's requirements for a digital asset that does not need to be registered as a security are:
- The funds that will be raised as a result of the sale of the token will not be used to develop its own platform.
- TKJ's digital assets will immediately be used exclusively for their intended purpose (to pay for the services of the company).
- TKJ must limit the ability to transfer digital assets to its own platform.
- TKJ tokens will be sold exclusively at a fixed price - $ 1 per coin.
- TKJ has the ability to buy back its own tokens only at a discounted price and only in the absence of a court order on the liquidation of the company's digital assets.
- The TKJ company should promote its own tokens in the market, focusing on their functionality, and not on the prospect of increasing their rate.
It is worth noting that this position of FinHub specialists is not mandatory for implementation by the main financial regulator of the United States. Nevertheless, with its help you can understand the nuances of the placement and sale of digital assets, which are not subject to mandatory registration in accordance with the law on securities.
Regulatory implications
By and large, the TKJ framework and letter of failure to take action are not strikingly different from previous SEC guidelines. But it is worth noting that from these analytical tools you can get additional information about the factors that are taken into account during the analysis.
The framework program answers the questions of market participants regarding the feasibility of carrying out certain operations with digital assets. It is also worth understanding that the above guidelines may be changed or interpreted differently over time. For this reason, third parties and issuers involved in the placement of digital assets are simply obliged to closely monitor the development of the legal framework and carefully analyze specific factors. This will help to avoid future litigation and the loss of a huge amount of time and money.