SEC Staff Publish New Crypto Guidelines to Supplement the Howey Test

SEC Commissioners have published a new framework to provide further clarity on ICO’s and their applicability to U.S securities laws.

Bill Hinman and Valerie Szcezepanik from the United States Securities and Exchange Commission (SEC) FinHub have released a new document on April 3 containing additional guidelines for distinguishing if ICO’s are in fact “Investment Contracts”.

The guidelines, which both SEC Commissioners have confirmed merely represents “Staff views” and is “not binding on the Divisions or the Commission”, have been created to supplement the SEC’s existing criteria for determining whether an offered Digital Asset is a security or not. The Howey case is currently the only test that the SEC has in its arsenal to establish whether digital assets sold in ICOs are traded securities under US securities law.

The Howey test is comprised of 3 separate components:

  • Has there been an investment of money?
  • Was the money invested in a common enterprise?
  • Was there an expectation to receive profits based solely on the performance of others?

If these 3 components are satisfied then an asset will be recognised as a traded security under US law, and the issuer will need to register with the SEC or fall under a registration exemption rule.

Within the new guidelines, the 3rd component of the Howey Test has been expanded to include ‘Active Participants (AP)’ - which encapsulates promoters, sponsors and other third party affiliates. This means that Youtube shillers could potentially be included in the Howey test, if a purchaser expects to receive profits on a cryptocurrency based on their promotional efforts.

Pages 3-5 of the document contains an exhaustive list which sets out the scope APs, and details the level of engagement that is required for promoters to be considered as APs.

Pages 9 - 10 include a revised list of factors that a project may possess that exempts them from the Howey test. This includes have a fully operational and developed network.

The new guidelines do not constitute legal advice, but have instead been created to address the lack of clarity surrounding ICOs and help token issuers better understand the parameters of the United State’s stringent securities laws. Something that critics and congressmen have been crying out for, for a number of years.

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