Interpretation of the SEC "Digital Assets" Investment Contract "Framework Analysis" (with full text translation)
On April 3, the US Securities and Exchange Commission (SEC) issued an analysis of the investment framework for digital currency, written by Finance Director William Hinman and the head of the US Securities and Exchange Commission's Financial Technology Center (FinHub) Valerie Szczepanik. The SEC indicated that it was not a committee's rules, regulations or statements, and that the committee neither approved nor approved its content. Furthermore, the framework does not replace existing case law, legal requirements or statements or guidance from committees or staff.
The framework still uses Howey Test to determine whether the issuance of digital currency is a securities issue, but a more detailed analysis of the behavior that may cause Howey Test to be established, and reference to the issuer's design and distribution mechanism. There are three elements that affect Howey Test's ability to determine whether a currency is issued as an "investment contract":
- Investment funds
- General enterprise
- Reasonable expectation of profit from the efforts of others
The investment funds and the judgment of the general enterprise are very easy, and the key lies in the third element. The author then splits it into two separate elements: the effort to rely on others, and the reasonable expected return. The framework focuses on the “economic reality” of the transaction and “how the nature of the tool is given through the terms of the distribution, the distribution plan and the potential economic incentives.” That is, the transaction itself and the way in which digital assets are issued and sold.
In summary, the framework proposes three main points.
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First, the framework proposes the concept of Active Participant and indicates that the AP can be a sponsor, sponsor or other third party (or a third party affiliate). This concept will cause some confusion for practitioners and believe that the concept is not specific enough. However, it is not difficult to understand that the concept of AP is proposed to distinguish between the project sponsors and the blockchain community participants. Due to the incentive effect of digital assets and the fan attributes obtained by ICO project financing, the community participants will Spontaneous participation in the efforts of the blockchain community.
Second, the framework attempts to elaborate on the nature of the effort. It is believed that the task of the management nature of the AP's success or failure that affects the project is the core of the completion of the condition. In the same way, the ICO project has a community of money-bearers, and many publicity, marketing, and even community governance work is done spontaneously by the community. Therefore, the framework details some of the behaviors that can potentially judge the importance of AP efforts for your reference.
The third is to try to explain the intention of holding digital currency. Obviously, many people participate in ICO for investment. Due to the strong liquidity of digital assets, many holders wait for value-added and then sell in the secondary market. So how do you judge that there are investors who are buying digital currency? The framework considers whether the matching of the goods and services provided by the project itself and the total value of the issued currency is a key element. If the circulation and currency value are closely related to the growth of the project's services and commodities, and the possibility of sale is limited, then the holder's intention to consume is more obvious.
Judging from the conditions of judgment, the framework enumerates specific behaviors that may lead to the triggering of the condition in terms of relying on the efforts of others and profit expectations.
Rely on the efforts of others
The framework believes that the task of management performed by the AP is the core of the completion of the condition. In addition, the framework lists other operational tasks that affect APs that are judged. If these tasks are critical, they will also be conditional on relying on others' efforts. For example, the importance of these operations depends on whether the functions represented by the tokens have been realized, the role of the AP in the price of digital assets, and the active players playing a leading or core role in the continued development of the network or digital assets. Role, or play a continuing management role in determining or exercising judgments about the network or characteristics or rights represented by digital assets.
The framework states that the assessment of digital assets should also consider whether there are reasonable profit expectations. The profit can be the capital increase generated by the initial investment or the development of the commercial enterprise, or the participation in the income generated by the purchaser's use of funds. Price increases arising from external market forces that only affect the supply and demand of underlying assets (such as general inflation trends or the economy) are generally not considered “profits” under the Howe test. In summary, the profit section emphasizes quantity, transferability, use of objects and relevance to the services and products offered by the network.
How are digital assets not judged as securities?
Finally, the framework also lists possible attributes that enable digital assets not to be judged as securities. In summary, the efforts of active participants (including any subsequent active participants) do not affect the success of the project and the project is independent. The decentralized operation of digital assets that can be exchanged for goods and services within the network does not have an expectation of appreciation.
The Blockchain Research Center of the Institute of Financial Science and Technology of Tsinghua University believes that the particularity of the community and the incentive mechanism makes the SEC's behavior more conservative. It can only determine whether a single item violates the securities law through the form of precedent, and the SEC has not modified the securities law. Permissions. The framework provides an understanding of how SEC staff can incorporate digital assets into the existing securities law framework. From the SEC's point of view, Bitcoin and Ethereum's participation maintainers are clearly fragmented, so these two digital assets are not securities. Therefore, this framework re-emphasizes whether the functions contained in the digital currency have been realized during the ICO period and what role developers play in it.
Framework Analysis of "Digital Assets "Investment Contracts"
First, the introduction
If you are considering an initial pass (sometimes referred to as "ICO"), or otherwise participate in the issuance, sale, or distribution of digital assets, then you need to consider whether the US federal securities laws apply to this offering. One of the thresholds is whether digital assets are “securities” in the legal sense. The term “securities” includes “investment contracts” and other components such as stocks, bonds and transferable shares. In order to determine whether a digital asset has characteristics of any product that conforms to the definition of "securities" under the federal securities laws, digital assets should be analyzed. In this guide, we provide a framework for analyzing whether a digital asset has a particular type of security—a feature of an “investment contract”. Committees and federal courts often use "investment contract" analysis to identify specific, new types of tools or models, such as digital assets, whether they are securities under federal securities laws.
The Howe Court case of the US Supreme Court and subsequent case law found that there is an "investment contract" if investing money in a common enterprise and reasonably expecting profits from the efforts of others. The so-called "Hooway Test" applies to any contract, plan or transaction, whether or not it has any characteristics of a typical security. The focus of Howie's analysis is not only on the form and terms of the tool itself (in this case, digital assets), but also on the environment of digital assets and the way in which they are issued, sold or resold (including secondary market sales). Therefore, issuers and other individuals or entities engaged in the marketing, distribution, sale, resale or distribution of any digital asset need to analyze the relevant transactions to determine whether the federal securities laws apply.
Federal securities laws require the issuance and sale of all securities, including securities involving digital assets, or registration under their regulations, or eligibility for registration. The registration terms require individuals to disclose certain information to investors and that the information must be complete and not materially misleading. This disclosure requirement further drives the goal of federal securities law to provide investors with the information they need to make informed investment decisions. In the information, the information that must be disclosed includes information related to the basic management work that affects the success of the business. This applies not only to the company, but also to other types of companies, regardless of their organizational structure or form. If there is no legal requirement to disclose these “efforts” and the progress and prospects of the company, there may be significant information asymmetry between the management and promoters of the company, and there may be information between investors and potential investors. Asymmetry. Reducing these information asymmetries through necessary disclosure can protect investors and is one of the main purposes of federal securities law.
Second, Howe's application in digital assets
In this guide, we provide a framework for analyzing whether a digital asset is an investment contract and whether the issuance and sale of digital assets constitute a securities transaction. As mentioned above, in the Howe test, when investing in funds in a general enterprise and reasonable expectations to obtain profits from the efforts of others, it constitutes an "investment contract." Whether a digital asset meets the Howe test at the time of distribution and sale depends on the particular facts and circumstances. We will analyze each of the factors that influence the Howard test below.
A. Investment funds
The first branch of the Howe test is usually achieved through the issuance and sale of a digital asset, as digital assets are acquired through purchase or exchange of value, whether in the form of actual (or legal) funds, A type of digital asset or other consideration .
B. General enterprise
The court usually analyzes “general enterprise” as a unique element that constitutes an investment contract . When evaluating digital assets, we found that “general businesses” usually exist .
C. Reasonable expectations for profit from the efforts of others
In general, the main problem with the Howard test to analyze digital assets is whether the purchaser has a reasonable expectation of making a profit (or other financial return) from the efforts of others. A purchaser may expect to achieve a return on asset appreciation by participating in distribution or other means, such as by making a profit in the secondary market. When sponsors, sponsors or other third parties (or third party affiliates) (each, "active participants" or "AP") provide basic management work that affects the success of the business, as well as reasonable expectations of investors from these efforts When the profit is made, the branch of this test is reached. Related to this inquiry is the “economic reality ” of the transaction and “what is the nature of the tool through the terms of the distribution, the distribution plan and the potential economic incentives .” Therefore, this inquiry is objective and concerned. The transaction itself and the way in which digital assets are issued and sold.
The following characteristics are especially important when analyzing whether to reach the third branch of the Howey test:
Rely on the efforts of others
Ask a buyer whether to rely on other people's efforts to focus on two core elements:
• Does the purchaser have reasonable expectations of relying on active participants?
• Are these efforts “an undeniable important factor, an effort that affects the critical management nature of a company's success or failure,” rather than those of a ministerial nature?
Although the following factors are not decisive, the stronger they exist, the more likely they are to rely on “the efforts of others”:
• An active participant is responsible for the development, advancement (or enhancement) of operations and promotion of the network , especially if the person purchasing the digital asset expects the active participant to perform or supervise some tasks, ie to achieve or retain the network or number The intended purpose or function of the asset .
When the network or digital assets are still evolving, and the network or digital assets are not fully functional at the time of distribution or sale, the purchaser will reasonably expect the active participants to implement the functions of the network or digital assets in the future (direct or indirect). ), especially when active participants promised future development for the preservation or appreciation of digital assets.
• Basic tasks and responsibilities are expected to be completed by active participants rather than by non-affiliated, dispersed network user groups (often referred to as “decentralized” networks).
• An active participant creates or supports a market or price for digital assets . This may include, for example, active participants being: (1) controlling the creation and distribution of digital assets; or (2) taking other actions to support the market price of digital assets, such as by limiting supply or ensuring scarcity, such as through repurchase, "Destruction" or other behavior.
• Active participants play a leading or central role in the continued development of networks or digital assets. In particular, active participants play a leading or central role in determining governance issues, code updates, or how third parties participate in transaction verification of digital assets.
• Active participants have a continuing management role in determining or exercising judgments about the network or characteristics or rights represented by digital assets, such as:
Decide whether and how to compensate those who provide services to the network or the entity responsible for overseeing the network.
Decide whether and where digital assets are traded. For example, a purchaser can reasonably rely on active participants to obtain liquidity, such as an active participant having arranged, or committing a digital asset to trade on a secondary market or platform.
Decide who will receive additional digital assets and under what conditions.
Make decisions or contributions on management-level decisions, such as how to raise funds through sales of digital assets.
It plays an important role in verifying or confirming transactions on the network, or to some extent responsible for the continued safe operation of the network.
Completion judgments or decisions on the management level will usually directly or indirectly affect the success of the network or the value of digital assets.
• Buyers will reasonably expect to promote their own interests and increase the value of their network or digital assets through the efforts of active participants, such as:
Active participants have the ability to achieve capital appreciation from the value of digital assets. This can be demonstrated, for example, if an active participant retains shares or proceeds of a digital asset. In these cases, the purchaser would reasonably expect to promote their own interests and increase the value of the network or digital assets through the efforts of active participants.
Active participants assign digital assets as compensation to management, or active participant compensation is associated with digital asset prices in the secondary market. Within the scope of these facts, individuals who expect to receive compensation can take steps to establish the value of digital assets.
Active participants directly or indirectly own or control the intellectual property of a network or digital asset.
Active participants monetize the value of digital assets, especially if digital assets have limited functionality
• Whether the sale of a digital asset before it is sold as a security requires a reassessment of whether the asset is subsequently issued or sold, and whether there are other considerations related to “the efforts of others”, including but not limited to:
Whether the efforts of active participants (including any subsequent active participants) continue to be important to the value of digital asset investments.
Whether the network in which the digital asset operates operates in such a way that the buyer no longer reasonably expects the active participants to perform the necessary management or enterprise efforts.
Whether the efforts of active participants no longer affect the success of the company.
2. Reasonable expected income:
The assessment of digital assets should also consider whether there are reasonable profit expectations. Profits can be capital appreciation generated by the initial investment or the development of a commercial enterprise, or participation in the proceeds of the use of the purchaser's funds . Price increases arising from external market forces that only affect the supply and demand of underlying assets (such as general inflation trends or the economy) are generally not considered “profits” under the Howe test.
The more features below, the more likely it is to have the above reasonable profit expectations:
• Digital assets give holders the right to share corporate income or profits or to realize the capital gains of digital assets.
Opportunities may come from the value added of digital assets, at least in part from the operation, promotion, improvement or other positive development of the network, especially if there is a secondary trading market that enables digital asset holders to resell their digital assets and realize revenue.
This may also be the case when a digital asset gives the holder a dividend or a distribution of rights.
• Digital assets can be transferred or traded on a secondary market or platform, or are expected to be transferred or traded in the future .
• Buyers have reason to expect that the efforts of active participants will result in capital appreciation of digital assets and therefore a return on purchases.
• Digital assets are more widely available to potential buyers than intended users of goods or services or users who need network capabilities.
• The number of digital asset offerings and purchases represents the investment intent, not the number that a single user is using. For example, the number of offers and purchases far exceeds the reasonable amount required by any user, or as small as the assets in the network cannot be used.
• There is no clear correlation between the purchase/providing price of digital assets and the market price of a particular good or service that can be exchanged with digital assets.
• There is no significant correlation between the number of transactions that a digital asset typically trades (or the quantity that the buyer typically purchases) and the number of base goods or services that a typical consumer purchases for use or consumption.
• Active participants have raised more than needed to build a functional network or digital asset.
• Active participants can benefit from its efforts because it has the same digital asset class as digital assets distributed to the public.
• Active participants can continue to spend money from gains or operations to enhance the functionality or value of the network or digital assets.
• Digital assets are marketed directly or indirectly through:
The ability of active participants to build or develop the value of a network or digital asset.
The marketing method of digital assets indicates that it is an investment, or the person who is asked to hold the assets is an investor.
The intended use of the sale of digital assets is to develop a network or digital asset.
The future (rather than the present) function of the network or digital asset, as well as the prospects for active participants to deliver this feature in the future.
• Establish a commitment to business or operations (implicit or explicit) rather than delivering existing goods or services that are used on existing networks.
• The transferability of digital assets is a key sales feature.
• The potential profitability of network operations or the potential value added of digital asset value is highlighted in marketing or other promotional materials.
• Availability of the digital asset trading market, especially when active participants implicitly or explicitly commit to creating or supporting a digital asset trading market.
Other factors should be considered when digital assets sold as securities before the assessment should be reassessed at a later quotation or sale, as they relate to “reasonable profit expectations”, including but not limited to:
• Buyers of digital assets no longer believe that the ongoing development efforts of active participants will be a key factor in determining the value of digital assets.
• The value of digital assets has shown a direct and stable correlation with the value of goods or services that can be exchanged or redeemed.
• The volume of trading of digital assets corresponds to the level of demand for goods or services that can be exchanged or redeemed.
• Whether the holder can use digital assets for their intended functions, such as accessing goods and services on a network or platform or through a network or platform.
• Any economic benefits that may arise from the value added of digital assets are accompanied by the right to use the intended function.
• No active participant has access to important non-public information or is considered to hold important internal information about digital assets.
3. Other relevant considerations
In assessing whether there are reasonable profit expectations from other people's efforts, the federal courts look at the economic reality of the transaction.  By doing so, the court also considered whether the instrument was offered and sold for use or consumption by the purchaser. 
Although none of the following uses or consumer characteristics are decisive, the more they exist, the less likely the Howe test will be met:
• Distributed ledger networks and digital assets are fully developed and operational.
• Holders of digital assets can immediately use them on the network for intended functions, especially if there are inherent incentives to encourage such use.
• The creation and structure of digital assets is designed and implemented to meet the needs of users, rather than meeting the speculation of their value or their network development. For example, digital assets can only be used on the network and can usually only be held or transferred in an amount corresponding to the intended use of the purchaser.
• There is limited prospects for the appreciation of digital assets. For example, digital assets are designed to keep their value constant or even decrease over time, so a sane buyer is not expected to hold digital assets as an investment for a longer period of time.
• Regarding a digital asset called a virtual currency, it can be used immediately for payment in various situations or as a substitute for real money (or fiat money).
This means that you can use digital assets to pay for goods or services without first converting them to other digital assets or real money.
If it is characterized as a virtual currency, the digital asset actually acts as a value store that can be saved, retrieved, and then exchanged for value.
• Digital assets that represent rights to goods or services that are currently redeemable on a developed network or platform to obtain or otherwise use those goods or services. Relevant factors can include:
There is a correlation between the purchase price of a digital asset and the market price of a particular good or service that it can exchange or exchange.
Does digital assets increase with consumer intent or investment or speculation?
The intent to consume digital assets may also be more pronounced if the goods or services behind the digital assets are only available through the use of digital assets on the network, or can be obtained more efficiently by using digital assets on the network.
• Any economic benefit that may arise from the appreciation of the value of a digital asset is accompanied by the right to use it for the intended function.
• Digital assets are marketed in a way that emphasizes the power of digital assets, rather than in the way that the potential value of digital asset markets grows.
• Potential buyers have the ability to use the network and use (or have used) digital assets for their intended function.
• Constraints on the transferability of digital assets are consistent with the use of the asset rather than promoting the speculative market.
• If active participants promote the creation of a secondary market, the transfer of digital assets may only be carried out by users of the platform and between users of the platform.
Digital assets with these types of usage or consumption characteristics are unlikely to be investment contracts. For example, take an online retailer with a mature business as an example. The retailer creates a digital asset that is only for the consumer to purchase the product on the retailer's network, provides the digital asset for sale in exchange for real money, and the digital asset can be exchanged for the real currency to a product of comparable physical price. The retailer continues to market its products to its existing customer base and advertise its digital asset payment methods as part of these efforts, and can “reward” customers using digital assets based on product purchases. Upon receipt of digital assets, consumers are immediately able to use digital assets to purchase products on the web. Digital assets are not transferable; instead, consumers can only use them to purchase products from retailers or sell them to retailers at a discount to the original purchase price. Based on these facts, digital assets are not investment contracts.
Even in the case where digital assets can be used to purchase goods or services on the network, in the case where the capabilities of the network or digital assets are developed or improved, there may be securities transactions if the following conditions exist: digital assets to goods or services Value discounts are offered or sold to purchasers; digital assets are offered or sold to purchasers in quantities that exceed reasonable use; and/or resale of these digital assets has limited or no constraints, especially as active participants continue to work to improve The value of digital assets or the promotion of secondary markets.
Third, the conclusion
The above discussion identifies some factors that market participants should consider when evaluating whether a digital asset is offered or sold as an investment contract and is therefore a security. It also identified some factors in determining whether digital assets may no longer be securities and when digital assets may no longer be securities. These factors are not exhaustive in assessing whether a digital asset is an investment contract or any other type of security, and no single factor is decisive; instead, we provide them to help those involved in the provision, sale, or distribution of digital assets and their The consultant will refer to these issues when considering these issues. Market participants are encouraged to seek advice from securities advisers and interact with employees through www.sec.gov/finhub.
 The lack of currency considerations for digital assets, such as digital assets distributed through so-called “bounty schemes”, does not mean that investments that are not satisfied with monetary investment. As the Commission explained in the DAO report, “In deciding whether or not there is an investment contract, the investment in 'funds' does not need to be in cash” and “although Howey refers to 'investment funds',” it is well known that cash is not an investment contract. The only form of contribution or investment. “DAO Report 11 (citation omitted). See In the Tohahawk Exploration LLC, Securities Act Rel. 10530 (August 14, 2018) (issuing the offer and sale of securities under the so-called “Bounty Plan”) People provide tokens to investors in exchange for services that are designed to enhance the issuer’s economic interests and facilitate transactions. In addition, the lack of currency considerations for digital assets, such as digital assets distributed through so-called “airdrops”, does not mean Investors that do not satisfy monetary investments; therefore, airdrops may constitute the sale or distribution of securities. In so-called “airdrops”, digital assets are allocated to holders of another digital asset, usually to facilitate their circulation.
 In order to satisfy the “general enterprise” aspect of the Howey test, the federal courts require “horizontal commonality” or “vertical commonality”. See Revak v. SEC Realty Corp., 18 F. 3d. 81, 87-88 (2d Cir. 1994) (discussing horizontal commonality as “connecting the fate of each investor with the fate of other investors by pooling assets, usually combined with pro-rated profits” and two verticals A variant of commonality, with a focus on “the relationship between the facilitator and the investor.” On the other hand, the committee itself does not require vertical or horizontal commonality, nor does it regard the “common cause” as the term “investment contract”. A unique element. In Balkart, 57 SEC 488, 496 n. 13 (April 8, 2004); see also the Commission's supplementary summary in Chapter 14 of the SEC v. Edwards case, 540 US 389 (2004) (on 11th Remand of the Circuit Court)
 According to our experience to date, investments in digital assets constitute investments in the general enterprise, as the fate of digital asset buyers is related to each other or to the success of the sponsor's efforts. See SEC v. Int'l Loan Network, Inc., 968 F. 2d 1304, 1307 (DC Cir. 1992).
 Howey, 328 US, at 298. See Tcherepnin, 389 US, 336 (“Looking for the meaning and scope of the word 'safety' in [behavior], the form should be ignored as substance, and the focus should be on economic reality ".)
 Joiner, 320 US at 352-53
 SEC v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 US 821, 94 S. Ct. 117, 38 L. Ed. 2d 53 (1973) ("Turner").
 In this guide, we use the term “network” extensively to cover the various elements of a network, enterprise, platform or application that make up a digital asset.
 We recognize that digital asset holders may make some effort in network operations, but these efforts do not negate the fact that digital asset holders rely on the efforts of active participants. The plan gives [investors] “nominal or limited liability does not negate the existence of an investment contract.” SEC v. Koscot Interplanetary, Inc., 497 F. 2d 473, 483 n.15 (5th Cir. 1974) (references and quotation marks omitted). If the work provided by the active participants is “an undeniable important factor, the necessary management that affects the failure or success of the business”, and the active participants are not just executive ministers or routine tasks, then there may be investment contracts. See Turner, 474 US, 482; see also DAO report (although DAO token holders have certain voting rights, they still reasonably rely on other people's management efforts). Management and corporate
 See Forman, 421 US at 852.
 Digital assets can only be exchanged or exchanged for goods or services on a network or platform, and cannot be transferred or sold in other ways. More likely, it is a payment behavior of goods or services that purchasers use or consume digital assets. See the discussion of "Other related considerations."
. As mentioned above, in the Howey test, the court conducted an objective investigation focusing on the transaction itself and the way it was offered.
. See Forman, 421 US, 852-53 (where a buyer's investment in him is not “completely attracted to the prospects of earnings”… [but] the motivation is to use or consume the purchased items… the securities law Not applicable.").
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