The US Securities and Exchange Commission (SEC) has issued a digital asset investment contract framework designed to provide encryption companies with guidance on whether cryptocurrencies are securities. This is the first important job of the US Securities and Exchange Commission's FinHub program. The program is a strategy team launched by the SEC in October 2018 to liaise with financial technology and cryptocurrency companies and is committed to more substantive regulatory guidance.
This specific framework was summarized after years of guidance from law enforcement agencies. Under the guidance of law enforcement agencies, the SEC prosecuted the 1CO operator and the CIS project company after the sale of the certificate to punish the opportunists who took advantage of the harsh and unscrupulous methods in the bull market from 2016 to 2017.
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This 13-page new framework will be a clear touchstone for cryptocurrencies, and it can test whether the SEC will treat an asset as a security. However, just as the SEC used to enforce law enforcement for 1CO coordinators and brokers/dealers, the guidance is not limited to vouchers, but also to cryptocurrency exchanges, custody organizations, hedge funds, marketing companies, and “other professional services”. .
“With the continuous development of financial technology, capital formation methods and market structures, market participants should be aware that the activities they may be carrying out are within our jurisdiction,” the SEC said in a press release on the new report.
“The framework is not intended to provide a detailed overview of the law, but rather an analytical tool that helps market participants assess whether federal securities laws apply to the issuance, sale or resale of specific digital assets.”
The importance of this guidance document
So, when is cryptocurrency issued as a kind of security?
This document is based on the Howey Test. The Howie test is the touchstone of the definition of an investment contract as determined by the S946 Supreme Court decision. It's worth noting that this test not only focuses on the assets being released or sold, but also on how it is offered or sold. This is the most significant for 1CO, because the SEC has been keen to remind investors and entrepreneurs for many years, insisting that the cryptocurrency is simply “application-based” and that it is difficult to get rid of the securities attributes.
According to the guidance, “According to the Howie test, when funds are invested in a common business and it is reasonably expected to profit from the efforts of others, there will be an 'investment contract'.” “A specific digital asset is in Whether it meets the Howie test when it is issued or sold depends on the specific facts and circumstances."
The document then identifies the three main conditions that constitute an investment contract, namely: the funds or value of the investment (whether legal or cryptocurrency), and the existence of a “common enterprise” (ie, some centralized entities provide contracts and Buyers share common interests) and expectations of profit or return .
Since the first two items are boring (and the document states that, based on their experience, the SEC believes that most of the CIS sales meet these two criteria), the framework reveals the specific conditions and nuances of the third point very thoroughly.
The document states that, basically, a pass may be considered a security if its purchaser relies on the efforts of “active participants” (ie, centralized entities) and there is “reasonable profit expectations”. In essence, a manager, company, or a centralized entity is a security if it directs the development of cryptocurrency and is primarily responsible for its success. For the sake of extension, if the holder of the certificate expects “active participants” to increase the price through their management efforts, and if “active participants” commit to ownership in the project/revenue prospects, and bluntly promote the project to stimulate The price appreciates, then this is a kind of securities.
For the SEC, the increase in the price of the certificate is not the same as the profit under the Hayey test, because the price increase of speculative assets comes from market forces rather than actual company operations and revenue streams.
With all of these factors in mind, the document confirms what the SEC said when it excluded Bitcoin and Ethereum from the securities market. In essence, if a project is sufficiently decentralized and has a clear work product whose value is related to the application, not the expectation of profit, then it is not a pass.
All in all, if the profit for the pass is driven by speculation and its development is central, then the pass is a kind of security .