April 4, 2019

Digital Assets: Corp Fin Staff Dishes on How to Avoid Howey

Yesterday, Corp Fin Director Bill Hinman & Senior Advisor for Digital Assets Valerie Szczepanik issued a statement announcing new Staff guidance on when tokens & other digital assets will be regarded as “securities” subject to SEC regulation.  Here’s an excerpt:

As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub is publishing a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security. The framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.

Also, the Division of Corporation Finance is issuing a response to a no-action request, indicating that the Division will not recommend enforcement action to the Commission if the digital asset described in the request is offered or sold without registration under the U.S. federal securities laws.

The 13-page “Framework for ‘Investment Contract’ Analysis of Digital Assets”  represents the most detailed guidance that the Staff has provided on the application of the Howey test to digital assets.  It walks through each element of the Howey test and identifies key characteristics of a digital asset that  influence the Staff’s views about whether that asset involves an “investment contract.”

The guidance in the Framework is likely to be helpful to issuers planning token offerings.  But it’s unlikely to please the crypto-evangelists who seek a light touch – or even a “hands-off” approach – from the SEC.  That’s because the Framework makes it very clear that the SEC will continue to apply the Howey test to digital assets with considerable rigor. As they say, if you don’t like it, write to Congress.

Digital Assets: So What About That “TurnKey Jet” No-Action Letter?

Bill Hinman’s statement referenced a new no-action letter – TurnKey Jet (4/3/19) – in which Corp Fin said it wouldn’t recommend an enforcement action against an issuer if it proceeded with a token offering without registration.  This is pretty earth-shattering news, right?  Yeah, not exactly. Don’t get me wrong – it’s certainly a landmark, but it’s also a fairly prosaic application of the Howey test to a deal involving the sale of fully-functional tokens structured in such a way as to squeeze out any profit potential associated with their ownership.

Corp Fin’s response letter walks through the key factors in its decision, some of which are highlighted in this excerpt from the request letter explaining why there’s no expectation of profit involved with the tokens:

It will not be technically possible to trade and transfer Tokens from the Platform in a non-Platform secondary market at a premium. Further, it will be economically impractical to trade Tokens within the Platform in a secondary market since TKJ will offer continuous, ongoing Token sales at one USD per Token which should cause the market price of Tokens not to exceed one USD per Token. These restrictions on transfer are indicative of the consumptive nature of the Tokens.

The TKJ Program memberships are non-equity memberships and will be non-transferable. The Consumers will represent that they are obtaining the TKJ memberships and Tokens for their own use and not as an investment or to profit. The TKJ memberships and Tokens will not be marketed to the public as investments. The funds that the Consumers prepay for the on-demand air charter services will be nonrefundable and will be immediately redeemable for air charter services, so no Consumer will have a reasonable expectation of profit.

Gosh, that kind of takes all the fun out of it, doesn’t it?

A New SEC Commissioner Nominee: Allison Lee

Earlier this week, the White House announced that President Trump had nominated Allison Lee to fill the vacant Democratic slot on the SEC. Allison previously served in the SEC’s Division of Enforcement & as Counsel to former Commissioner Kara Stein.  This WSJ article says it is unclear when the Senate will hold her confirmation hearing. If she’s confirmed, the SEC will operate with a full slate of members – something that’s been unusual in recent years.

John Jenkins