Hire a Team of SEC and Digital Assets Compliance Experts
Digital assets have unique reporting obligations. If you want compliance advice or help protecting your digital assets, dealing with SEC investigations or charges resulting from digital assets compliance issues, Contact us today.
The SEC on Compliance
The SEC has a broad approach to how entities and individuals conduct themselves under its jurisdiction. The agency has previously shown how far it is willing to go when dealing with entities and individuals violating existing federal laws, and harming US investors and capital markets.
A special area of interest is digital assets. The SEC considers digital assets to be securities subject to existing federal securities laws. However, the agency must first establish if a digital asset qualifies to be called a security. Don't wait for your company or dealings to fall under the SEC's radar. Let us assist you with SEC digital assets compliance.
At Blockchain Lawyer, we have lawyers with expertise in securities law and digital asset compliance. We have former federal agency employees, among other consultants in our team, who know exactly what federal agencies like the SEC look for in digital asset compliance issues.
Let's craft a compliance strategy for you or fight federal charges you may be facing. Retain us and safeguard your reputation, resources, and freedom.
The SEC on Digital Assets Regulation
Digital assets include all assets capable of being issued, transferred, and being stored on a distributed ledger like blockchain. Notable examples of digital assets include coins, tokens, virtual currencies, NFTs, and tokenized projects.
Before the SEC can exercise jurisdiction over any digital asset, the underlying asset must qualify to be a security under the agency's jurisdiction. For unique cases where an asset isn't clearly a security, the SEC utilizes a special test known as the Howey Test.
Guide to the SEC's Howey Test
The test lets us know if the SEC can exercise jurisdiction or not. The SEC has covered issues relating to digital assets having similarities to traditional securities before. By taking such an approach, the agency is able to regulate digital assets despite lacking explicit authority.
As a result, besides the usual mandate of regulating brokers, dealers, and exchanges for traditional securities like stocks, the SEC can, in special circumstances, take action against entities behind cryptocurrency offerings (ICOs) that qualify as securities offerings but aren't registered as such.
How Does the Howey Test Work?
The Howey Test assesses four main factors to determine whether the SEC should exercise jurisdiction. Since the SEC has a mandate to regulate securities in the US, the Howey Test focuses on finding out if an underlying digital asset or digital asset offering qualifies as a security offering. If the Howey Test conditions aren't met, then the underlying digital asset or offering isn't a security.
Howey Test Conditions
Condition 1: Investment of Money
If an entity or individual is selling a digital asset such as an ICO (Initial Coin Offering), they automatically meet condition 1. Since an ICO transaction involves buying a digital asset with money (fiat) currency or cryptocurrency, it qualifies as an investment of money.
Condition 2: Common Enterprise
There must be commonality tying an investor's money to other investors' money within the project. Since an offering like an ICO involves many investors pooling their money for a common goal, this condition is satisfied. Alternatively, there must be a connection between the digital asset and all investors' digital assets.
Condition 3: Expectation of Profiting
This condition for determining if a digital asset or offering meets the SEC's definition of a security or security offering is challenging to meet. In fact, this condition is a basis for debate and litigation. The condition is self-explanatory i.e., an investor expecting to profit (make money) from an investment in a digital asset.
The expectation can take many forms, such as capital appreciation of the underlying digital asset. The profits can also be expected from an investor's share in part of a project's earnings or the business using investors' funds.
This condition can't be met satisfactorily in many cases if the investor is supposed to enjoy profits solely because of demand and supply factors of an underlying digital asset. Expectation of profiting should be based on factors beyond general market forces or conditions.
Condition 4: Profits Derived from Third-Party Efforts
Like the above condition, the fourth condition in the Howey Test is also hard to meet. If an investor relies heavily on managerial efforts of third parties and those efforts successfully produce a profit, this condition can be satisfied in most cases.
If an investor relies more on others and less on market forces, the condition is easily fulfilled. Generally, profits should be largely from third parties and less from an investor's participation in the investment or market forces.
Digital Assets Agreements /Contracts for “Consumption"
Most digital assets that have some form of utility to investors aren't considered to be securities. As a result, resulting contracts don't need SEC registration.
A typical contract for consumption includes when a business creates a digital asset strictly for use by its customers within a platform such as the business's app or website or for specific purposes only – i.e., buying/selling products.
The most critical thing is differentiating securities and “contracts for consumption." To do this, you must ask yourself if the digital asset can be used outside the issuer's platform. If the asset is limited to the issuer's ecosystem and clients, that asset isn't likely to qualify as a security.
However, there may be other circumstances that can still make the digital asset to be more of a security than a contract for consumption.
To ensure you treat a digital asset as required and follow the SEC's digital assets compliance requirements, get legal advice from a seasoned attorney knowledgeable on differentiating utility from security tokens.
Expert Digital Asset Compliance Help
If you want to launch a digital assets project like an ICO, you can attract federal agency investigations if the offering involves a digital asset that qualifies as a security and you don't register such an offering.
The SEC requires all securities offerings to be registered. You must also comply with reporting and disclosure guidelines or risk SEC investigations, charges, and serious penalties, including possible jail time. As a result, before pursuing any digital assets venture, analyze your compliance obligations carefully.
At Blockchain Lawyer, we've established an SEC digital assets compliance team of consultants and attorneys that can do everything from structuring your ICO to ensure it doesn't require registration to defending you when you face SEC charges for noncompliance.
Contact us today. Our SEC digital assets experts are ready to offer a free, non-obligatory, and confidential consultation.