SEC | FinTech and Blockchain Law Watch

A Positive Step Forward or Much Ado About Nothing Yet Again? SEC FinHub Releases a “Framework for ‘Investment Contract’ Analysis of Digital Assets” and Historic No-Action Letter on Digital Assets for TurnKey Jet

Apr 03 2019

By Margaret N. Rosenfeld, Robert M. Crea, Jonathan M. Miner and Steven B. Levine

In a flurry of activity today, the U.S. SEC’s Strategic Hub for Innovation and Technology (“FinHub”) issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets” and the SEC’s Division of Corporation Finance (“CorpFin”) issued a historic No-Action Letter to Turnkey Jet, Inc. (“TurnKey Jet”) in connection with its offer and sale of digital assets. The Framework doesn’t contain anything substantially new for U.S. securities law practitioners who have been giving guidance to companies regarding digital assets (or utility tokens, security tokens or digital securities depending upon your term of choice) for some time, but serves as a good reminder of the SEC staff’s thought process in this area for those new to the space.

And in case you missed Footnote 1 to the Framework, Bill Hinman (SEC Director of CorpFin) and Valerie Szczepanik (SEC Senior Advisor for Digital Assets and Innovation) released a Statement on the Framework reminding everyone that the SEC has not approved or disapproved of the content and it is not a rule or regulation. These types of Frameworks are often how the internal staff at the SEC get the ball rolling on regulatory innovations (recall the legendary Project Aircraft Carrier of 1998). The Framework applies the factors set forth in the U.S. Supreme Court’s Howey case to digital assets, without going further. Therefore, it’s worth questioning whether Director Hinman has lost the argument internally at the SEC that he posited in his June 2018 Digital Asset Transactions remarks, in which he included “does application of the Securities Act protections make sense” in his list of considerations for assessing whether a digital asset offering is an investment contract.

The Future of Digital Asset Regulation: Key Regulators Give Their Thoughts at the D.C. Blockchain Summit (Part 2)

Mar 12 2019

By Daniel S. Cohen

On March 6^th, the Chamber of Digital Commerce held its Fourth Annual D.C. Blockchain Summit. One of the first panels featured a discussion on the current and future contours of the digital asset regulatory regime with Daniel Gorfine, Director of LabCFTC; Kavita Jain, FINRA’s Director of the Office of Emerging Regulatory Issues; Jessica Renier, Senior Advisor on Domestic Finance for the Treasury Department; and Valerie Szczepanik, the SEC’s Senior Advisor for Digital Assets & Innovation.

Ms. Szczepanik explained that the SEC staff is developing guidance regarding digital assets but declined to provide a timetable for its release. She noted that whether a digital asset is a security will, as it does now, depend on whether it is an investment contract in light of its individual facts and circumstances. Ultimately, the SEC is seeking to promote financial innovation, capital formation, and wealth creation but in balance with investor protections.

The SEC Expands its Enforcement Throughout the Digital Industry

Sep 23 2018

By Dan S. Cohen

The Securities and Exchange Commission (“SEC” or “Commission”) is ramping up its enforcement efforts in the digital asset industry, expanding its focus to include digital asset brokers and investment companies. On September 11, the Commission issued an order against a digital asset hedge fund and announced a settlement with a self-described “ICO superstore” for violating federal securities laws. The Commission fined Crypto Asset Management LP and its principal for failing to register as an investment company, among other things. According to the SEC, Crypto Asset Management, which trades digital assets exclusively, is an investment company pursuant to the Investment Company Act because it “invest[s], reinvest[s], own[s], hold[s] or trad[es] in securities.”

One Year after the “DAO Report” Three U.S. Courts Begin to Provide Crypto-Clarity

Jul 24 2018

By Clifford C. Histed and Nicole C. Mueller

One year ago today, the U.S. Securities and Exchange Commission (“SEC”) published the “DAO Report” which concluded that certain tokens issued in an initial coin offering (“ICO”) were securities under the Supreme Court decision SEC v. W.J. Howey Co. The Report stated that whether an ICO is a security offering will depend on the facts and circumstances, including the economic realities of the transaction. Confusion, private lawsuits, SEC enforcement actions, and even criminal prosecutions ensued, but three courts are about to provide clarity.

Metamorphosis: Digital Assets and the U.S. Securities Laws

Jun 28 2018

By Robert M. Crea, Anthony R.G. Nolan and Eden L. Rohrer

In the past year, the U.S Securities Exchange Commission (“SEC”) and Chairman Jay Clayton have repeatedly cautioned the cryptocurrency and initial coin offering (“ICO”) industries about the securities law implications for digital assets. On February 6, 2018, in testimony before the Senate Banking Committee, Chairman Clayton notably asserted that “[e]very ICO I’ve seen is a security.”

However, on June 14, 2018, William Hinman, the SEC’s Director of the Division of Corporation Finance, stated that, putting aside the fundraising that accompanied the creation of Ether, “current offers and sales of Ether are not securities transactions.” This statement was based on a novel theory of evolving decentralization that may very well have significant ramifications for cryptocurrency and ICO markets.

Please see our latest K&L Gates HUB article for a discussion about the context and implications for Director Hinman’s conclusions surrounding Ether. It also analyses the specific factors he suggests weighing in determining whether a given digital asset is a security.

Are Digital Asset Transactions Always Securities Offerings?

Jun 22 2018

By Andrew Massey and Evan Glover

On June 14, 2018, William Hinman, Director of the Division of Corporation Finance at the United States Securities and Exchange Commission, shared his views on whether digital assets (such as tokens or coins) that were originally offered in a securities offering can be subsequently sold in a manner that does not constitute a securities offering. CLICK HERE for the full remarks.

In some cases where a central enterprise is no longer being invested in, or where the digital asset is used for consumption (to purchase a good or service available through the network it was created), Hinman believes such an asset would not be considered a security. However, labeling a digital asset a “utility token” does not automatically cause the digital asset to become something that is not a security. Although the Supreme Court has stated that if someone is purchasing something for consumption, it is not a security, Hinman emphasized the Supreme Court’s stance that economic substance, not labels, of the transaction guides the legal analysis.

Conference Report – Blockchain and the Law: Towards a Responsible Blockchain Sector

Jun 22 2018

By Anthony R. G. Nolan and Julien E. F. Barbey

On June 14, Cardozo Law School in New York City held a conference entitled “Blockchain and the Law: Towards a Responsible Blockchain Sector.” The conference was led by a panel consisting of current and former commissioners and staff members of the SEC and the CFTC including Rob Cohen, director of the SEC’s enforcement division.

Among topics discussed was SEC Director William Hinman’s recent speech in which he stated that Ethereum is not a security. Panelists suggested this may indicate that the SEC would regard a token as being able to change its character over time, such that a token that was once a security can morph into one that is not a security. This would have important implications for market practices, potentially including the utility of SAFTs.

SEC Cautions “Utility Token” Sponsors and ICO Market Intermediaries

Dec 14 2017

By Robert M. Crea

On December 11, 2017, the SEC released a cease-and-desist order against a purported “utility token” sold by Munchee Inc. (“Munchee”) and a statement by Jay Clayton on Cryptocurrencies and Initial Coin Offerings. Two takeaways:

The SEC will scrutinize so-called “utility tokens” under the Howey test, and Chairman Clayton believes that most token sales he’s seen constitute securities offerings. The familiarity of the Munchee utility framework to other token offerings coupled with Chairman Clayton’s Statement could very well chill the market for utility tokens seeking to avoid application of federal securities laws.
The SEC expects intermediaries operating in crypto, specifically law firms, accountants, consultants and broker-dealers, to be “gatekeepers” of investor protection.

We will be providing a fuller analysis in the next several days.

New SEC Cyber Unit Obtains Emergency Action Against ICO

Dec 07 2017

By Robert M. Crea and Evan J. Glover

On December 4, 2017, the Securities and Exchange Commission’s (“SEC”) new Cyber Unit obtained an emergency asset freeze to halt a Canadian initial coin offering (“ICO”) called PlexCoin that had raised up to $15 million from thousands of investors. The SEC filed its complaint (“Complaint”) in the Eastern District of New York, alleging that the sponsor and his company, PlexCorps, marketed and sold securities to investors in the U.S. and elsewhere under a variety of false pretenses, including that PlexCoin would yield a 1,354% profit in less than 29 days. The complaint seeks permanent injunctions, disgorgement plus interest and penalties.

Initial Coin Offerings “Horrify” a Former SEC Commissioner

Nov 30 2017

By Robert Crea

On Sunday, November 26, 2017, the New York Times published an interview with Joseph Grundfest, former SEC Commissioner and current Stanford law professor. Professor Grundfest is sharply critical of the posture of initial coin offerings under U.S. federal securities laws. Given his persuasive voice on securities law matters and his influence in Silicon Valley, this interview may very well serve as a sobering wakeup call to the ICO marketplace.

Some notable quotes:

“ICOs represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi. . . .It’s more than the extent of the violation . . . . It’s the almost comedic quality of the violation.”
“These are not hard cases . . . . You don’t need teams of accountants poring over complex financing documents [to bring enforcement actions].”
“We’re waiting to see a whole bunch of enforcement actions in this space, and we wonder why they haven’t happened yet. . . .I hope what [the SEC is] doing is planning on a sweep of 50 ICOs.”

The article may be found here.

Tag: SEC