On April 3, the US Securities and Exchange Commission (SEC) released clearer guidelines for initial coin offerings (ICOs) and compliance with current US securities law through their Strategic Hub for Innovation and Financial Technology (FinHub). The FinHub “Framework for ‘Investment Contract Analysis of Digital Assets” opens with a notional statement of how the SEC recognizes the importance of blockchain and distributed ledger technology in fueling financial and technological innovation, and that these guidelines are “part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws”.¹

It is important to note that the SEC is not releasing new rules or regulations through this framework and does not formally approve or disapprove of its content. It is not intended to influence any current or outstanding “case law, legal requirement, or statements or guidance from the Commission or staff”.² The new framework is simply “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”.³ This document does not state anything particularly groundbreaking and some segments read more like a reminder to parties looking to launch digital assets to consult attorneys before proceeding with their offering.

A synopsis of the new framework can be broken down into two key parts. Firstly, if a party is interested in launching an ICO, they must be thoroughly familiar with current securities laws; secondly, digital assets and tokens as they relate to blockchain technology need to be carefully analyzed to see if they qualify as securities as defined by the SEC. In trying to assess whether a digital asset or token will qualify as a security, one should apply the Supreme Court’s Howey test. An investment contract exists where there is “the investment of money [or cryptocurrency] in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others”.⁴

Due to the fact that many have objected to the SEC’s use of the Howey test and their interpretation of the part that reads, “profits to be derived from the efforts of others” The framework brings the cryptocurrency community a new term: “Active Participant”.⁵ An active participant could be almost any third party or promoter that provides managerial guidance or work that influences the success of the investment or project. If investors witness the actions of active participants as indicative of their ability to derive profits from the enterprise, than the investment will likely be considered a security.

The framework also indirectly addresses some examples of historic precedence in which an offering may have promoted a security initially, but changed significantly enough over time to no longer be considered a security. The framework also lists a set of parameters that, if met, might prevent an offering from passing the Howey test. For example, if the asset can be used nearly immediately as a coupon or right to access some service or product, is intended for functionality and not speculation, or is more readily transferred as part of its intended use (and not intended for secondary market transfers), then the asset will not likely meet the criteria of a security in regard to the Howey test.

The announcement of this framework, coupled with the SEC Division of Corporate Finance’s release of the first no-action letter pertaining to the issuance of a token that is considered not to be a regulated security,⁶ witnessed a considerable number of reactions on social media within the cryptocurrency community. The no-action letter was addressed to TurnKey Jet, Inc, a company proposing a token program for membership in an air charter service. James Curry, TurnKey Jet’s lawyer, successfully argued that the tokens, tied to a single U.S. dollar and redeemed for services by members in the program, should not be deemed securities under the Securities Exchange Act of 1934.⁷

Are these two events happening at the same time merely coincidence?

Is this the definitive end for initial coin offerings?

How will this shape the token offerings of the future?

1. Bill Hinman, “Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets”, April, 2019.

2. U.S. Securities and Exchange Commission, “Framework for “Investment Contract” Analysis of Digital Assets”, April, 2019

3. Hinman.

4. U.S. Securities and Exchange Commission.

5. U.S. Securities and Exchange Commission.

6. Sia Mohajer, “SEC Issues First No Action Letter Featuring A Tokenized Digital Asset Which Is Not A Security”, The Tokenist, April, 2019.

7. Jonathan Ingram, “Response of the Division of Corporation Finance Re: TurnKey Jet, Inc.”, April, 2019.

Information is Opinion and Provided “AS IS.” The information provided herein is the opinion of Pink Sky Group. Certain information has been provided to Pink Sky Group by other third parties. Pink Sky Group has relied on information provided to it by such parties that it has not independently verified. Pink Sky Group cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete.
All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Pink Sky Group is under no obligation to revise or update any statements herein for any reason or to notify you of any such change, revision or update.

Information does not Constitute Investment, Tax, Estate Planning or other Professional Advice. Information on this page should not be construed as investment, tax, estate planning or other professional advice. Pink Sky Group is not acting as an investment or other professional adviser or otherwise making any recommendation as to any investor’s decision to invest in any security, industry, strategy or other financial instrument. Users should consult their own professional advisers regarding their own specific investment, legal or tax situation before making any investment, engaging in any tax or estate planning strategy or otherwise acting on any information provided herein.

Forward Looking Statements. This post contains forward looking statements based on Pink Sky Group’s expectations and beliefs. Those statements are sometimes indicated by words such as “expects,” “believes,” “will” and similar expressions. Any statements that refer to expectations, beliefs or characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Actual events or circumstances could differ materially and adversely from those expressed or implied in any forward looking statements as a result of various factors.