The SEC issues regulatory guidelines: such digital currency is not a "securities"

The road to compliance with digital assets has taken another big step forward.

Over the past 11 months, the Florida startup TurnKeyJet finally received a letter of no objection from the US Securities and Exchange Commission ( SEC ) Corporate Finance Department on the issue of tokens. (Note: This type of letter indicates that the agency will not recommend that the SEC enforce enforcement against the sponsor, thereby allowing the sponsor to be allowed to bypass the US securities registration requirements.)

TurnKey Jet is a startup that wants to increase the efficiency of the aviation industry through blockchain smart contracts. The company plans to issue a token ( TKJ for short ) whose sole role is to help users book private jets. The company plans to have a $ 1 equity for each token , and all issued tokens will be secured by FDIC insurance institutions.

In order to seek compliance, on April 2 , the company's attorney, James Prescott Curry, sent a letter of inquiry to the SEC for the issuance and sale of tokens.

On the evening of April 3 , Jonathan Ingram , Chief Legal Counsel of SEC Corporate Finance, issued the first no-objection letter to TurnKey Jet .

In response, according to the facts provided, if the TKJ can provide and sell the tokens according to the Securities Law and the Transaction Law without the registration, according to the opinions of the corporate lawyers that the tokens are not securities, the Corporate Finance Department will not The SEC proposed enforcement actions.

The reply also stated that the company must meet the following conditions in order to obtain approval from the regulatory body:

1. The funds from the issuance and sale of tokens shall not be used for technology development such as company platforms, networks and apps .

Binary Interpretation: Tokens can be issued only after the business is available, avoiding crowdfunding before the air currency and features are available.

2, the token function must be available immediately

Binary Interpretation: Users can use the token to immediately redeem the corresponding service, emphasizing the functional attributes of the token.

3. The token limit is circulated between the TurnKey Jet wallets and cannot be transferred to the wallet outside the platform;

Binary Interpretation: Limiting the liquidity of tokens and preventing speculation in the secondary market.

4. During the issuance and sale of tokens, the price of each token is USD 1 ;

Binary Interpretation: Guarantee the stability of token prices and reduce value-added attributes.

5. The token can only be repurchased at a discounted price unless it is required to be liquidated by the court;

Binary Interpretation: Avoiding project parties to manipulate price fluctuations and induce user investment.

6. It is not allowed to publicize the profit potential when issuing and selling tokens.

Binary Interpretation: Pay attention to the actual use of the token and prohibit the appreciation.

From these constraints, it is not difficult to see the SEC 's basic guidelines for the regulation of the issuance and sale of digital assets (especially practical tokens): emphasizing the functional attributes of tokens rather than value-added attributes; controlling the scope of circulation, limiting to the secondary market Transaction flow; keep the token price stable, preferably with value anchoring in French currency (US$); limit the use of funds for token issuance and sales.

Although the no-objection letter is not legally binding and usually depends on whether the sponsor operates in strict accordance with the provisions of the approved proposal, it has indicated the current attitude and regulatory standards of the regulatory body.

Especially as the first company to receive a letter of no objection, the entire process of TurnKey Jet is extremely difficult. According to James Prescott Curry , the letter of inquiry submitted by the company to the SEC on April 2 was the 10th version. It was submitted for the first time since May 23 , 2018 . During this time, the company also had more than 50 telephone conversations with SEC staff.

After such a long wait, I finally waited for the SEC 's first no-objection letter.

As the first no-objection letter, its value is not only to enable TurnKey Jet to bypass the securities registration supervision, but also to let other companies that also have the willingness to issue and sell tokens understand the attitudes and scales of the regulators, so that the latecomers have Standards that can be referenced and referenced are of great significance to the entire industry.

Figure: SEC 's reply to TurnKey Jet

Source: SEC official website


On the same day, the US Securities and Exchange Commission ( SEC ) issued its first “Digital Assets Investment Contract Attribute Analysis Framework Guide” to help market participants determine whether the various types of distribution, sale and distribution of digital assets are in compliance with federal securities laws. Provisions. In particular, the guidelines are not legally effective and are only the guidance provided by the SEC 's Center for Innovation and Financial Technology Strategy ( FinHub ).

Be aware that conducting ICO or issuing digital assets in the United States requires first consideration of compliance issues, that is, compliance with US federal securities laws. Before making compliance considerations, we need to solve one of the most critical issues, that is, whether digital assets have " securities " attributes. The securities here are very broad, including not only investment contracts but also other investment instruments such as stocks, bonds and transferable shares. The framework guidelines issued by the SEC only provide guidance on the analysis of the investment contract attribute of digital assets. There are not many statements on the hot issues of concern to investors, especially the brokers who hold cryptocurrencies that are currently of general concern in the market. The issue of the escrow qualification of the dealer, the SEC has not been clearly defined in the document, so it is not excluded that other similar guidance documents will be issued later.

Regarding how to make an "investment contract" attribute analysis of digital assets, the SEC cited the "Howey" test in the guidance document issued on April 3 . The famous Howey test originated from the 1946 SEC v. Howey Inc. case and subsequent trials of similar cases classified the Howey test (or " investment contract " judgment) into three areas:

1. Capital contribution, that is, many investors use their own funds to invest;

2. Investing in a common project, that is, many investors put funds into the same project;

3 , looking forward to profit and profit from the hard work of others, that is, many investors invest in the purpose of gaining profits, investors do not directly participate in the operation, but look forward to the project sponsors or operators to operate and make themselves profitable .

The Howey test can be applied to the analysis of any type of contract, plan or transaction, regardless of the securities attributes of the object being determined, and the Howey test not only focuses on the form of the investment tool itself, but also on other factors related to the investment tool, so In the context of judging whether a digital asset has an " investment contract " attribute, in addition to examining the characteristics of the digital asset itself, it is also necessary to examine various factors related to the issuance, sale and secondary market circulation of digital assets.


Digital Asset Howey Test

1. Funding

Whether purchasing and acquiring digital assets in legal currency, other digital assets or forms, as long as the value exchange is involved, it is in line with the judgment of the first aspect of the Howey test.

2 , joint project

According to the SEC 's experience to date, investments in digital assets constitute an investment in joint projects because the fate of digital asset traders is related to each other or to the efforts of project sponsors.

3 , looking forward to profit and profit from the hard work of others

The SEC cited some of the evaluation factors for the third aspect of the digital asset Howey test, including whether the token project depends on others, whether there is a reasonable profit forecast, the degree of network development, the function of the token and the market demand, and the token. The correlation between market prices and purchase prices. The assessment and analysis of this part is rather mixed, so more effort is needed to make the investment contract attribute of the digital asset.

The SEC also details how token issuers should view the issued and sold tokens, how they should be registered as securities, and whether digital assets previously sold as securities should be re-evaluated. In the guidance document, the SEC published four criteria for reassessment, including:

1. The distributed account book network has been developed and can be operated (users can use tokens to achieve the established functions);

2. Tokens are focused on specific uses rather than speculation;

3. The appreciation prospect of the token needs to be set;

4. If the currency is used as a settlement tool, the token must be operated in the form of value storage .

The guidance document issued by the SEC mainly clarifies how the project party evaluates whether the digital assets are classified as securities when the digital assets are issued and sold as investment contracts. At the same time, the document also gives some factors and evaluation criteria to consider when determining that digital assets are not securities. These factors and evaluation criteria are not comprehensive and there is no single decisive factor, but they still have a positive reference for those engaged in the issuance, sale and distribution of digital assets.



In general, the issuer of the token wants to carry out the ICO . There are usually three options in the US: registration as a securities issue, application for an exemption, or ensuring that the token does not have a securities attribute.

Obtaining a no-objection letter is a way to get an exemption and bypass the registration of securities. But for now, this approach is still very difficult.

The remaining question is how to determine whether the token is classified as a security. The guidance document issued by the SEC discusses the classification of securities.

Valerie a. Szczepanik , the SEC 's first senior adviser on digital assets and innovation, also spoke on this point, and his views are in line with the SEC 's evaluation criteria.

In her view, the decision to classify any token depends on how the token is sold . In general, a project that sells tokens in a promised investor's profit rather than a function is enough to be classified as a security.

For a blockchain platform such as Ethereum, because it is already sufficiently decentralized, there is currently no condition for classification as a security.

Author: Zero One Finance · Binary

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