While we’re on the topic of crypto, the Corp Fin Staff posted this letter last week in response to a no-action request by the DoubleZero Foundation. The Division responded that it will not recommend an enforcement action against DoubleZero if certain programmatic transfers are not registered under Section 5 of the Securities Act and its 2Z tokens are not registered as a class of equity securities under Section 12(g) of the Exchange Act. This Mayer Brown blog describes the Foundation, the DoubleZero Network and the 2Z tokens:

The Foundation was formed to support creation of the DoubleZero Network, a “purpose-built internet optimized for distributed systems, like blockchains.”  In its letter to the Commission, the Foundation argues that, while software and computing capabilities continue to improve, the hardware supporting networks has stagnated, and blockchain traffic must compete with all other public internet traffic for network capacity.  Since large technology companies also compete for network space, many have built their own fiber networks—and many of these networks have existing idle capacity . . .

[T]he DoubleZero Protocol enables creation of a marketplace for this existing underutilized fiber capacity, which is then linked to form the Network.  The more the Network grows by adding new participants, such as data center operators, with additional fiber links (“Network Providers”), the faster and more powerful it becomes.  Importantly, there is no central promoter or sponsor responsible for operating the Network.

The Foundation and other Network participants launched a new 2Z token, which will be offered and sold as compensation to:  (i) Network Providers for providing capacity to the Network, as outlined above, and (ii) Resource Providers for their calculation of Provider Payment amounts . . .

Network users will be able to acquire 2Z tokens on the secondary market and use these to pay Network fees in order to access the Network.  In addition, the Foundation plans to maintain a Token Treasury of 2Z Tokens to support the growth of the Network . . .

The Foundation does not believe that 2Z tokens are an investment, will not promote the Network or 2Z as a way for 2Z token holders to earn passive investment returns, and publicizes the view that 2Z is a digital asset for use in connection with the Network, emphasizing its utility.

The request letter argues that the fourth element of the Howey test (“entrepreneurial or managerial efforts of others”) is not satisfied because “the actions of the Providers themselves determine the success of the Network” and even though a secondary market for the 2Z tokens is likely to develop, even speculators that buy and sell 2Z on secondary markets would not be basing any expectation of profit on the “entrepreneurial or managerial efforts of the Foundation, the Network Providers, the Resource
Providers or any other third party.”

Most importantly, this Cooley blurb touts this major milestone in the regulation of crypto assets — the first no-action letter granted by the SEC to a crypto project since 2020 — as a framework for a potential path that other crypto projects can follow to compliantly distribute tokens in the US. Mayer Brown also notes that the no-action letter is a sign that the Commission staff is “open to engagement” on the application of the securities laws to the activities of crypto market participants.

– Meredith Ervine