At last week's Yahoo! All Markets Summit in Palo Alto, SEC Division of Corporation Finance Director William Hinman delivered a speech sure to send shockwaves through the crypto world. Applying the Howey test (which sets forth the elements necessary for determining whether a transaction involves the offer or sale of an "investment contract" and thus, a security, under the federal securities laws) to cryptoasset transactions, Director Hinman concluded that:
- To determine whether a token sale satisfies Howey, market participants should "primarily" consider whether the network on which the token operates is "sufficiently decentralized."
- Alternatively it is possible, through technological or contractual means, to design cryptoassets so that they function more like a consumer item and less like a security; however, the economic realities of a given token transaction (specifically the manner in which the token is offered and sold and the reasonable expectations of purchasers) controls any such determination.
- Cryptoassets originally offered in a securities offering can later be sold in a manner that does not constitute an offering of a security.
- Current offers and sales of Ether are not securities transactions.
Although in no way officially binding as a matter of SEC policy or federal securities law, Director Hinman's comments are tremendously important to the evolving cryptoasset marketplace in the United States. They provide guidance on a number of critical questions that exist at the margins of SEC Chairman Jay Clayton's position that he has not seen a single token issued through an ICO that is not a security, and warrant deep and careful consideration.
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