Two commissioners at the US SEC have published digital asset guidelines to help those launching or investing in various cryptos decide whether they fall under existing securities legislation. Whilst not an official SEC ruling, the commissioners behind the guidelines hope that they will aid market participants in determining the legality of a digital asset investment opportunity.
Many market participants in the digital currency space have previously demanded greater clarity from the SEC with regards the classification of digital currencies as securities. The guidelines published today should go someway to appeasing them.
The guidelines were published today by Securities and Exchange Commissioners Bill Hinman and Valerie Szczepanik. The document, titled Framework for ‘Investment Contract’ Analysis of Digital Assets, seeks to clarify how to determine whether a given digital currency will be deemed by the Securities and Exchange Commission as an investment contract, and thus would fall under federal securities laws.
The guidelines only focus on the classification of digital assets as one type of security – an investment contract. For this, the authors state that the long-established Howey Test should be used.
The Howey Test
The Howey Test states that an investment contract exists when an investment is made in a common enterprise with the expectation of profiting from the actions of others. The guidelines go on to explain how the Howey Test can be applied to crypto and in particular initial coin offerings.
The investment in a common enterprise aspect of the Howey Test is usually satisfied with cryptocurrency offerings, according to the SEC authors. However, “a reasonable expectation of profits derived from the efforts of others” is much harder to quantify.
Much of the guidelines’ content is dedicated to this topic. Many different examples are put forward for how the “efforts of others” in a cryptocurrency project could add to the value of an initial investment. It states that no one of the listed criteria is necessarily enough to guarantee that buying a given digital asset is indeed deemed an investment contract. However, the presence of multiple of the characteristics means it is much more likely to be.