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SEC Publishes Framework for Digital Assets Investment Contracts

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Ascertaining the status of digital asset as an investment contract and as a security will now be easier courtesy of the framework published on 3 April by the United States Securities and Exchange Commission (SEC) titled ‘Framework for ‘Investment Contract’ Analysis of Digital Assets’.

Two SEC Commissioners led the framework development; Valerie Szczepanik, senior advisor for Digital Assets and Innovation and Bill Hinman, director of the SEC’s Division of Corporation Finance.

The authors emphasized that the guidance is not a rule, regulation, or statement of the US Commission since it has neither approved nor disapproved the contents. They also added that the framework is neither exhaustive nor is supposed to be legal advice, but only serves as an analytical guide for initial coin offerings (ICO) operators and token issuers to determine whether the offering is subject to federal securities laws.

Only after reading the formal rules and regulations on the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), market participants can completely determine the status of their offerings. The framework also only focuses on determining one type of security, an investment contract, and doesn’t cover the full range of possible security classifications.

According to the 71-year old Howey Test, a contract exists for an investment in a common enterprise when investors are expecting profits. The framework deals with all aspects of the Howey test in detail for digital assets, starting with money investment and the unique element of a joint enterprise for investment contracts. For the later, the authors add, “in evaluating digital assets, we have found that a ‘common enterprise’ typically exists”.

The authors also added that a large part of the criteria deals with the economic reality of the transactions and “what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect”.


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