The U.S Securities and Exchange Commission (SEC) released a “Framework for ‘Investment Contract’ Analysis of Digital Assets” on Wednesday April 3 to enable all market entities to determine whether or not a crypto (digital asset) is considered an investment contract, and if so, a security.
The framework serves as an analytical tool which will enable operators of initial coin offerings (ICOs) and all token issuers ascertain whether or not their offering is going to conflict with the federal securities laws. All parties involved in the market are therefore advised to further visit formal rules and regulations accessible on the SEC’s FinHub – Strategic Hub for Innovation and FinTech.
Furthermore, Hinman and Szczepanik caution that as financial technologies, methods of capital formation and market systems continue to change, market participants should be aware that they may be carrying out crypto-related activities which fall within the SEC’s jurisdiction. For instance:
“Market participants may engage in activities which need registration of transactions and individuals or entities involved in those particular transactions,” they note.
The framework aims at ascertaining whether a certain crypto asset possess the characteristics of one specific type of security, an investment contract, instead of covering the full range of potential security classifications.
The data contained in the framework applies to bodies carrying out the following works associated with crypto assets: offering, selling or distributing; providing financial services like facilitating exchanges; management or advice; marketing or promoting; holding or storing; purchasing, selling or trading; plus, other professional services.
Based on the Howey Test, such a kind of contract is thought to be where there is an investment in a common enterprise, where investors are rationally led to assume profits that others produce.
The report gives details of Howey test regarding digital assets, starting with the investment of money and the separate component of a common enterprise which holds for investment contracts.
The framework gives most intricate criterion, a rational expectation of profits resulting from the efforts of others, since this is the major issue in examining a digital asset particularly under the Howey test.
According to the authors, the inquiry for this criterion emphases on the economic certainty of the transaction and:
“What character the instrument is provided in commerce by the terms of the offer, the plan of distribution, and the economic stimuli held out to the outlook.”
Several cryptocurrency advocates and legislators have frequently tasked the
SEC to create concrete and effective regulatory clarity for the interaction of distributed ledger technology (DLT)-based securities laws and coins.