US Securities Regulator Weighing Clearer Token Sale Rules

The US SEC currently applies the Howey test to determine whether a token is a security but may consider a more agile approach for token-based projects.

The US Securities and Exchange Commission (SEC) may consider more agile rules for token sale projects, as suggested in a speech by Commissioner Hester Pierce. One of the biggest challenges is testing token sales via the regulations applicable to security offerings, she pointed out.

Pierce reiterated that not all tokens fall under securities regulations.

“When the tokens are not being sold as investment contracts, however, they are not securities at all. Tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities,” she said.

However, most tokens are used for fundraising and some even have a reward structure, thus falling under the definition of securities.

The SEC will work to ensure that legitimate projects do not get blocked because of unsuitable regulations. Pierce gave as an example Basis, an algorithmic dollar-pegged coin which closed and returned $133 million to investors, citing overly strict regulations and excessive compliance expenses.

“We might be able to draw clearer lines once we see more blockchain projects mature. Delay in drawing clear lines may actually allow more freedom for the technology to come into its own,” Pierce added.

New projects and startups are attempting to raise funds through a different type of token, explicitly labeling it as a security and launching it only after full registration. The so-called utility tokens have almost disappeared from the market despite the USA being the most active scene for crowdsales and new token issuances.

The SEC is also careful not to label as securities assets that are already decentralized, and their transactions serve a different purpose. Thus, Ethereum (ETH) may be seen as a security during the token sale, but its subsequent use makes it a utility.

Pierce also believes that token-based projects may take up voluntary disclosure to signal quality in a market becoming more skeptical. 

“After an initial period of unbridled enthusiasm over ICOs, cooler heads seem to be thinking about ways to assess ICOs—to separate the wheat from the chaff. Sponsors of ICOs that want to succeed will make voluntary disclosures to signal their quality. Disclosure will happen regardless of whether the securities disclosure regime applies to ICOs,” the commissioner said.

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