By: Deborah R. Meshulam and Benjamin Klein
On April 3, the US Securities and Exchange Commission’s (SEC) Strategic Hub for Innovation and Financial Technology (FinHub) published its “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The same day, the SEC’s Division of Corporation Finance also issued its first “No Action” letter to a startup planning to sell digital assets.
The Framework describes the factors used by SEC Staff for assessing whether digital assets are “investment contracts” subject to federal securities laws; the No Action letter applies those factors. The Framework suggests that, over time, digital assets may evolve to a point where they are no longer securities.
While neither exhaustive nor binding, the Framework consolidates and expands upon principles previously articulated in SEC enforcement actions, press releases, and speeches. As such, it offers industry participants insights on the types of activities that can expose them to US federal securities regulation.
A careful reading of the Framework, however, suggests that the SEC’s staff continues to view offer, sale, and distribution of most digital assets – especially those in early stages where purchaser funds are used to develop and launch the asset and its platform – as securities. The interpretive advice addressed in the No Action letter offers a rare exception to this general approach and thus is of limited value to market participants.
In this Securities Enforcement Alert, we examine the Framework as well as the No Action letter and assess how these developments are likely to impact market participants. Click here to read the full alert.