It was five months ago that the U.S. Securities and Exchange Commission assured guests at a conference during the Washington D.C. Fintech Week Conference that there were guidelines for ICOs coming.
“We’ll elaborate on that in a very plain English way, so ‘do I think I have a security offering,’ look at that guidance and you should be able to sort things out.” - William Hinman SEC Director
The result is a 13 page document that does in fact present the primary objectives of an investment, an ICO and the vital aspects of these financial procedures for both investors and the organizations considering launching an ICO. The document focuses on tokens and outlines how and when these cryptocurrencies would be considered securities.
“The term “security” includes an “investment contract,” as well as other instruments such as stocks, bonds, and transferable shares. A digital asset should be analyzed to determine whether it has the characteristics of any product that meets the definition of “security” under the federal securities laws.” - https://www.sec.gov/files/dlt-framework.pdf
The epitome of determining whether a digital asset is an investment contract is with the “Howey Test.” The essential question is, “does the success of (in this case) the digital asset relay primarily on the efforts of others?” This question is broken down into just two key variables in the SEC’s document:
Does the purchaser reasonably expect to rely on the efforts of an AP?
Are those efforts “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,” as opposed to efforts that are more ministerial in nature?
The document also breaks down the methods for re-evaluation after completion of an ICO, or at a time when a digital asset is no longer being sold as an investment The criteria is as follows:
The “distributed ledger network and digital asset are fully developed and operational” (meaning individuals can immediately use the token for some function);
The token is focused on a specific use case rather then speculation;
“Prospects for appreciation” in the token’s value are limited; and
If billed as a currency, the token actually operates as a store of value.
While this guidance has been a long time coming, and provides some legal clarity for token issuers, it is not a legally binding document, and should be seen more as a guideline.
By: BGN Editorial Staff