US SEC's latest framework guidelines on whether digital assets are securities (full text)

Digital Assets "Investment Contract" Analysis Framework


I. Introduction

If you are considering a first-time token issue, often referred to as "ICO," or otherwise providing, selling, or distributing digital assets, [2] then you need to consider whether the US federal securities laws apply. One of the thresholds is whether such digital assets are a kind of "securities" under these laws [3] . The definition of the term “securities” includes “investment contracts” [4] and other instruments such as stocks, bonds and convertible shares. You should analyze this digital asset to determine if it has any product characteristics that meet the definition of "securities" in the federal securities laws. In this guide, we provide a framework for analyzing whether a digital asset has the characteristics of a particular type of security, the "investment contract." The Commission and federal courts often use “investment contract” analysis to determine whether unique or novel instruments (such as digital assets) are securities subject to federal securities laws.

The Howe case of the US Supreme Court and the subsequent case law found that when funds are invested in an ordinary company and it is reasonably expected to profit from the efforts of others [5] , there is an "investment contract." This so-called "Hayy test" applies to any contract, plan or transaction, whether or not it has any of the characteristics of a typical security [6] . 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 surrounding the digital asset and the way it is offered, sold, or resold (including secondary market sales). Therefore, the issuer and other individuals and entities engaged in the marketing, distribution, sale, resale or distribution of any digital asset will need to analyze the relevant transaction to determine whether the federal securities laws are applicable.

The Federal Securities Act requires the issuance and sale of all securities, including securities involving digital assets, either registered in accordance with its rules or eligible for registration. The registration terms require the issuing individual or entity to disclose certain information to the investor, which must be complete and must not be materially misleading. This disclosure requirement further advances the purpose of the federal securities law to provide investors with the information they need to make informed investment decisions. The information that must be disclosed includes information related to the basic management work that affects the success of the business [7] . For example, for a company, this information is correct, but for other types of businesses, regardless of their organizational structure or form, it may be correct [8] . There may be significant information asymmetry between the company's management and sponsors and investors and potential investors if there is no legal disclosure of these efforts and the company's progress and prospects. Reducing these information asymmetry through necessary disclosures protects investors and is one of the main purposes of federal securities law.


US Securities and Exchange Commission (SEC) Washington Headquarters

II. Howey test in digital assets

In this guide, we provide a framework for analyzing whether a digital asset is an investment contract and whether the sale of digital assets is a securities transaction. As mentioned above, under the Howie test, there is an “investment contract” when there is money invested in an ordinary business and it is reasonably expected to profit from the efforts of others. Whether a particular digital asset is sold at the time of the Howe test depends on the specific facts and circumstances. We will discuss each element of the Howie test below.

A. Capital investment

The issuance and sale of digital assets is generally consistent with the first aspect of the Howie test, as digital assets are purchased in physical (or statutory) currency, another digital asset or other type of consideration or in exchange for other values. acquired. [9]

B. Common enterprise

Courts often analyze “common companies” as a unique element of investment contracts. [10] When evaluating digital assets, we found that a “common company” usually exists. [11]

C. Reasonable expectations for profit from the efforts of others

Often, the main problem with analyzing digital assets under the Howie test is whether the buyer has a reasonable expectation of profit (or other financial return) from the efforts of others. Buyers may expect to achieve returns by participating in distribution or by other means of achieving asset appreciation, such as profitable sales in the secondary market. When a promoter, sponsor or other third party (or a third party affiliate) ( each is an "active participant" or "AP" ) provides the necessary management effort to influence the success of the business, and the investor reasonably expects When these profits are profitable, the requirements of this test are met. Related to this investigation is the “economic reality” of the transaction [12] and “what is the nature of the tool in business based on the terms of the distribution, the distribution plan and the economic incentives for the prospect.” [13] Therefore, this The survey is objective and focuses on the transaction itself and the way in which digital assets are offered and sold.

The following characteristics are particularly relevant when analyzing whether the third aspect of the Howie test is met.

Rely on the efforts of others

Surveys of whether digital asset buyers rely on others' efforts to get rewards focus on two key issues:

a. Does the buyer reasonably expect to rely on AP's efforts?

b. Are these efforts “those important efforts that are undeniable, important management efforts that affect the success or failure of the business” [14] , rather than those that are essentially more partial?

Although the following features are not necessarily decisive, the stronger they exist, the more likely it is that the purchaser of digital assets will rely on “the efforts of others”:

a. The AP is responsible for the development, improvement (or enhancement), operation or promotion of the network [15] , especially when the purchaser of digital assets expects the AP to perform or supervise the tasks required for the network or digital asset to achieve or retain its intended purpose or function. Time. [16]

  1. If the network or digital assets are still under development and the network or digital assets are not fully functional at the time of release or sale, the buyer has reason to expect the AP (directly or indirectly) to further develop the functionality of the network or digital assets. In this case, AP is committed to further development to enable digital assets to gain or grow value.

b. There are some basic tasks or responsibilities that are performed by the AP and are expected to be performed by the AP rather than by an unrelated, decentralized network of user communities (often referred to as "decentralized" networks).

c. AP creates or supports markets, or prices for digital assets [17] . This may include, for example, an AP: (1) controlling the creation and distribution of digital assets; or (2) taking other actions to support the market price of digital assets, such as repurchasing, "destruction" or other activities to limit supply or ensure Scarce.

d. The AP has a leadership or central role in the ongoing development of the network or digital assets. In particular, APs play a leading or central role in determining governance issues, code updates, or how third parties participate in validating transactions related to digital assets.

e. The AP has a continuing management role in making decisions or making decisions about the characteristics or rights represented by the network or digital assets, such as:

  1. Decide whether and how to compensate personnel who provide services to the network or to entities responsible for network oversight.
  2. Decide whether digital assets can be traded and where they are traded. For example, a purchaser may reasonably rely on an AP to obtain liquidity, such as an AP arranging or committing to arrange a transaction for a digital asset on a secondary market or platform.
  3. Decide who will receive additional digital assets under what conditions.
  4. Develop or participate in management-level business decisions, such as how to deploy funds raised from selling digital assets.
  5. It plays a leading role in the verification or confirmation of online transactions, or is otherwise responsible for the continued security of the network.
  6. Make other management decisions or decisions that directly or indirectly affect the success of the network or the value of digital assets.

f. The buyer has reason to expect AP to make an effort to promote its own interests and to enhance the value of the network or digital assets, such as:

  1. APs have the ability to achieve capital appreciation from the value of digital assets. For example, if an AP holds a digital asset share or equity, this can be proven. Under these circumstances, the buyer has reason to expect the AP to strive to promote its own interests and enhance the value of the network or digital assets.
  2. AP distributes digital assets as compensation to management, or AP's compensation is tied to the price of digital assets in the secondary market. Within the scope of these facts, individuals who are expected to be compensated will take steps to build the value of digital assets.
  3. The AP directly or indirectly owns or controls the intellectual property of a network or digital asset.
  4. APs monetize the value of digital assets, especially if digital assets have limited functionality.

There are other considerations in assessing whether digital assets previously sold as securities should be reassessed at a later issue or sale, as these considerations are related to “the efforts of others”, including but not limited to:

  1. Whether the value of AP's efforts (including any successor APs) for digital asset investments remains important.
  2. Regardless of whether the network on which the digital assets are based operates in such a way that the purchaser no longer reasonably expects the AP to perform the necessary management or entrepreneurial efforts.
  3. Whether the AP's efforts no longer affect the success of the company.

2. Reasonable profit expectations

The assessment of digital assets should also consider whether there are reasonable profit expectations. Among other things, the profit can be the capital increase generated by the initial investment or the development of the enterprise, or the participation generated by the use of the purchaser's funds. [18] According to the Howie test, price increases caused by external market forces (such as general inflation trends or economics) affecting the supply and demand of underlying assets are generally not considered “profits”.

The more digital assets have the following characteristics, the more likely they are to have reasonable profit expectations:

a. Digital assets give the holder the right to share the company's earnings or profits, or the right to realize the proceeds through the capital appreciation of digital assets.

  1. This opportunity for appreciation from the value of digital assets comes from, at least to some extent, the operation, promotion, improvement or other positive development of the network, especially if there are digital assets that can enable digital asset holders to resell them. The secondary trading market can achieve revenue.
  2. This can also be the case where a digital asset gives the holder a bonus or a distribution of rights.

b. Digital assets can be transferred or traded on a secondary market or platform, or they can be traded in the future. [19]

c. The purchaser has reason to expect that AP's efforts will result in a capital appreciation of the digital asset, which will result in a return on purchase.

d. Digital assets are widely available to potential buyers, not intended users of goods or services or users who require network capabilities.

  1. The amount of digital assets provided and purchased indicates the intention of the investment, not the number of network users. For example, the number of offers and purchases greatly exceeds the reasonable demand of any potential user, or is small enough to make the actual use of assets in the network impractical.

e. There is little apparent correlation between the purchase/issue price of digital assets and the market price of a particular good or service that can be used to exchange digital assets.

f. There is little apparent correlation between the number of transactions that a digital asset typically trades (or the amount that the purchaser typically purchases) and the number of base goods or services that a typical consumer purchases for use or consumption.

g. APs raise more funds than are needed to build a functional network or digital asset.

h. .AP can benefit from its efforts because it has the same digital asset class as those distributed to the public.

i. AP continues to spend money from revenue or operations to enhance the functionality or value of the network or digital assets.

j. This digital asset uses, directly or indirectly, any of the following for sales:

  1. AP's expertise or its ability to build or grow the value of a network or digital asset.
  2. The marketing of digital assets indicates that it is an investment, or that the holder of the request is an investor.
  3. The expected functionality of selling digital assets is to develop a network or digital asset.
  4. The promise of establishing a business or operation (implicit or explicit), rather than providing the currently available goods or services for use by an existing network.
  5. The transferability of digital assets is a key sales feature.
  6. The potential profitability of network operations, or the potential added value of digital asset values, is highlighted in marketing or other promotional materials.
  7. The availability of digital asset trading markets, particularly APs, implies or explicitly commits to creating or otherwise supporting the trading market for digital assets.

In assessing whether a digital asset previously sold as a security should be reassessed at a future offering or sale, other factors related to “reasonable profit expectations” are considered, including but not limited to:

a. The purchaser of digital assets no longer reasonably expects that AP's ongoing development work will be a key factor in determining the value of digital assets.

b. The value of digital assets has been shown to be directly and steadily related to the value of goods or services that can be exchanged or redeemed.

c. The volume of trading of digital assets corresponds to the level of demand for goods or services that are exchangeable or redeemed.

d. Whether holders of digital assets can use digital assets for their intended functions, such as accessing goods and services through a network or platform.

e. Is any economic benefit from the appreciation of digital assets incidental in order to obtain the right to use its intended function?

f. APs must not obtain important, non-public information about digital assets, or they will be considered to hold important inside information about the digital assets.

3. Other relevant considerations

When assessing whether there is a reasonable expectation of profit from the efforts of others, the federal court looks at the economic reality of the transaction. [20] In the process, the court also considered whether the issuance and sale of the tool was for the buyer to use or consume. [twenty one]

Although the following characteristics of use or consumption are not necessarily decisive, the stronger they exist, the less likely they are to meet the Howie test:

a. This distributed ledger network and digital assets are fully developed and operated.

b. Holders of digital assets can immediately use them for the intended functions on the network, especially where there is a built-in incentive to encourage the use of such features.

c. The creation and structure of digital assets is designed and implemented to meet the needs of their users, not to hype their value or the development of their networks. For example, such digital assets can only be used on the web and can usually only be held or transferred at the buyer's expected usage amount.

d. The prospects for the appreciation of digital assets are limited. For example, the design of digital assets provides that its value will remain the same, even as time goes by, so a rational buyer will not expect to hold such digital assets as an investment for a long time.

e. For a digital asset called virtual currency, it can be used immediately to make payments in a variety of situations, or as a substitute for real (or legal) currency.

  1. This means that you can purchase goods or services with digital assets without first converting them to another digital asset or real currency.
  2. If it is described as a virtual currency, the digital asset is actually a value store that can store, redeem, and exchange valuable things later.

f. For digital assets representing goods or services rights, they may now be redeemed within the developed network or platform to obtain or otherwise use the goods or services. Relevant factors may include:

  1. There is a correlation between the purchase price of a digital asset and the market price of a particular good or service, which can be redeemed or exchanged.
  2. Digital assets are provided in incremental form and are related to consumer use, investment or speculative purposes.
  3. If the goods or services based on digital assets can only be obtained through the use of digital assets on the network or obtained more efficiently, the intention to consume digital assets may also be more obvious.

g. Any economic benefits arising from the appreciation of digital assets are incidental to the acquisition of the right to use digital assets.

h. The way digital assets are marketed emphasizes the power of digital assets rather than the potential for digital asset market value growth.

i. Potential buyers have the ability to use the network and use (or have used) digital assets for the intended functionality.

j. Restrictions on the transferability of digital assets are consistent with the use of the asset and do not contribute to the speculative market.

k. If the AP promotes the creation of a secondary market, the transfer of digital assets can only be carried out between users and users of the platform.

Digital assets with these usage types or consumption characteristics are unlikely to be investment contracts. For example, take an online retailer with a fully developed business. The retailer creates a digital asset for the consumer to purchase the product only on the retailer's network and to provide digital asset sales in exchange for the actual currency, which can be redeemed for products denominated in that real currency. As part of these efforts, the retailer continues to market its products to existing customer segments, promote its digital asset payment methods, and may “reward” digital assets to customers based on purchased products. Once the consumer receives the digital asset, the consumer can immediately use the digital asset to purchase the product on the network. Such digital assets are not transferable; instead, consumers can only use them to purchase products from retailers or sell them to retailers at discounted prices. Based on these facts, such digital assets will not be investment contracts.

Even in this case, digital assets can be used to purchase goods or service networks, and the functions of this network or digital asset are being developed or improved, among other things, in one of the following situations, which may involve securities transactions: The discounted price of the value of the good or service is offered or sold to the purchaser; the digital asset is offered or sold to the purchaser in excess of the fair use; and/or the restrictions on reselling these digital assets are limited or unlimited, especially when the AP continues Efforts to increase the value of digital assets or to facilitate secondary markets.

III. Conclusion

The above discussion identifies some factors that market participants should consider when evaluating whether digital assets are offered as investment contracts (ie, securities). It also identifies some factors to consider when determining whether and when a digital asset is no longer a security. In assessing whether a digital asset is an investment contract or any other type of security, these factors are not exhaustive, and no single factor is decisive; instead, we provide them to help those engaged in the issuance, sale or distribution of digital assets. People, and their suggestions when considering these issues. Market participants are encouraged to seek advice from securities advisers and interact with employees through .


1. The framework represents the opinions of the US Securities and Exchange Commission ("Commission" in the article) Innovation and Financial Technology Strategy Center ("FinHub", "Staff" or "We"). It is not a rule, regulation or statement of the committee, and the committee neither approves nor objects to it. In addition, this framework does not replace or replace existing case law, legal requirements, statements or guidance of committees or staff. Instead, the framework provides additional guidance in areas previously dealt with by committees or staff. See the investigation report under Section 21(a) of the Securities Exchange Act of 1934: DAO (Exchange Act Rel. No. 81207) (July 25, 2017) ("DAO Report"); William Seaman, Digital Asset Trading: When Howie Meets Gary, Speech at Yahoo Financial All Market Summit: Encryption (June 14, 2018), h/speech- Hinman -061418.

2. The term "digital assets" as used in this framework refers to assets issued and transferred using distributed ledger or blockchain technology, including but not limited to the so-called "virtual currency", "coin" and "token".

3. The definition of “securities” can be found in Section 2(a)(1) of the Securities Act of 1933 (hereinafter referred to as “Securities Law”) and Section 3(a)(10) of the Securities Exchange Act of 1934. Section 2(a)(36) of the Investment Company Act of 1940 and Section 202(a)(18) of the Investment Advisers Act of 1940.

4. This framework is intended to provide guidance and is based on the experience of SEC staff to date and relevant laws and jurisprudence. It is not an exhaustive treatment of legal and regulatory issues related to the analysis of whether a product is a security, including an analysis of investment contracts for general digital assets. We expect that the analysis of digital assets as securities may evolve over time as the digital asset market matures. In addition, no factor is necessarily decisive for the existence of an investment contract.

5.SEC v. WJ Howey Co., 328 US 293 (1946) ("Howey"). See United Housing Found., Inc. v. Forman, 421 US 837 (1975) ("Forman"); Tcherepnin v. Knight, 389 US 332 (1967) ("Tcherepnin"); SEC v. CM Joiner Leasing Corp., 320 US 344 (1943) ("Joiner"). ↵

6. Whether a contract, plan, or transaction is an investment contract is a federal legal issue, not a state law issue, and does not depend on whether there is a formal contract between the parties. On the contrary, in the Howie test, “forms are ignored because of substance, and emphasis (being) is placed on economic reality.” Howey, 328 US at 298. The Supreme Court further explained that the term “securities” “embodies one A flexible principle, not a static one, to satisfy the “variable schemes designed by those who use the funds of others for profit”.

7. The issuer of digital assets, like all issuers, must provide comprehensive, fair and significant disclosure of information that meets federal securities laws. The issuer of digital assets should be guided by the regulatory framework and the concept of importance. What is substantive depends on the nature and structure of the issuer's specific network and environment. See TSC Industries v. Northway, 426 US 438, 449 (1976) (an important fact is that "if a rational shareholder is likely to think it is important when making an investment decision," or "if a rational investor thinks it This fact is important because it has significantly changed the 'general information mix' provided to shareholders.)

8. See The DAO Report.

9. The lack of monetary considerations for digital assets (such as those allocated through so-called “bounty schemes” does not mean that they are not satisfied with the investment in money. According to the Commission’s commentary in The DAO Report, “In determining whether an investment contract exists, the “money” investment does not need to be in the form of cash, and “although the Howie test refers to “money investment”, it is obvious Cash is not the only contribution or form of investment in creating an investment contract. "The DAO Report is at 11 (reference is omitted). See re Tomahawk Exploration LLC, Securities Act Rel. 10530 (August 14, 2018) (issuing tokens under the so-called “Bounty Plan” constitutes the issuance and sale of securities, as the issue provides tokens to investors in exchange for Services designed to promote the economic interests of the issuer and foster the securities trading market). In addition, the lack of monetary considerations for digital assets (such as assets that are allocated through so-called "airdrops") does not mean that they are not satisfied with capital investment; 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.

10. In order to meet the “common enterprise” aspect of the Howie test, the Federal Court requires either “horizontal commonality” or “longitudinal commonality”. See Revak v. SEC Realty Corp., 18 F. 3d. 81,87-88 (No. 2, 1994) (Discussing horizontal commonality is “Bundling the wealth of each individual investor with the wealth of other investors through the pool of assets, usually in combination with prorated profits”, and vertical Two variants of commonality, the two variants focus on the “relationship between the initiator and the investor's subject”. On the other hand, the committee itself does not require vertical or horizontal commonality, nor does it regard “common enterprise” as A unique component of the term "investment contract". Re Barkate, 57 SEC 488, 496 n.13 (Apr. 8, 2004). See Committee's Supplementary Note, Section 14, Vol. 540, p. 389 (2004) (on the return of the 11th Circuit Court of Appeal).

11. Based on our experience to date, investments in digital assets constitute an investment in a common enterprise because the fate of digital asset buyers is interrelated or related to the success of the sponsor's efforts. See SEC v. Int'l Loan Network, Inc., 968 F.2d 1304, 1307 (DC Cir. 1992).

[[12]] Howey, 328 US at 298. See also Tcherepnin, 389 US at 336 (in the [Act] looking for the meaning and scope of the term "securities", should pay attention to the substance regardless of form, but should emphasize 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 encompass the various elements of a network, enterprise, platform, or application that make up a digital asset.


We recognize that holders of digital assets may suggest some work on the network, but these efforts do not negate the fact that the holders of digital assets are dependent on AP efforts. A 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 (with citations and quotation marks omitted). If the efforts provided by the AP are “an undeniable important work, the basic management work that affects the success or failure of the company”, and the AP is not only the daily tasks of the executive department, then there is likely to be an investment contract. See Turner, 474 US at 482; see also The DAO Report (although DAO token holders have certain voting rights, they still reasonably rely on the management of others). A typical feature of management and corporate efforts is the involvement of expertise and decision-making that influences the success of a business or business through the application of skills and judgment.


See, for example, Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce Fenner & Smith, 756 F. 2d 230 (2d Cir. 1985).


See Forman, 421 US at 852.


In some cases, digital assets may be exchanged or redeemed as goods or services on the network or on a platform, and may not be transferred or sold in other ways, more likely to be a payment for a good or service. In a commodity or service, the buyer has an incentive to use or consume digital assets. See the discussion of "Other related considerations."


As mentioned above, according to the Howie case, the court conducted an objective investigation of the transaction itself and the manner in which it was provided.


See Forman, 421 US at 852-53 (if the buyer is not “only attracted by the prospect of return on his investment… (and) is the desire to use or consume the purchased item… the securities law does not apply.”) [[ twenty one]]

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