On April 4, 2025, the SEC’s Division of Corporation Finance (“CorpFin”) issued a statement on stablecoins. In Particular, the statement addresses stablecoins that are designed to maintain a stable value relative to the United States Dollar (“USD,”) on a one-for-one basis, can be redeemed for USD on a one-for-one basis (i.e., one stablecoin to one USD), and are backed by assets held in a reserve that are considered low-risk and readily liquid with a USD-value that meets or exceeds the redemption value of the stablecoins in circulation (“Covered Stablecoins”).
Stablecoins Generally
A stablecoin is a type of crypto asset designed to maintain a stable value relative to a reference asset, such as USD, another fiat currency, a commodity like gold, or a pool or basket of assets. Stablecoins usually track with the underlying asset on a one-to-one basis (for example, one stablecoin for $1 USD). Stablecoins can maintain their value in different ways, including through a set reserve of underlying assets, or algorithms that increase or decrease the supply of stablecoins based on demand.
SECs View on Covered Stablecoins
It is the SEC’s view that the offer and sale of Covered Stablecoins does not involve the offer or sale of securities as defined by the federal securities laws. As such, persons involved in the process of “minting” (or creating) and redeeming Covered Stablecoins do not need to register those transactions with the SEC or fall within one of the Securities Act’s exemptions from registration.
Characteristics of Covered Stablecoins
Covered Stablecoins are crypto assets designed and marketed for use as a means of making payments, transmitting money, or storing value. They are designed to maintain a stable value relative to USD and are backed by USD and/or other assets that are considered low-risk and readily liquid so as to allow a Covered Stablecoin issuer to honor redemptions on demand. A Covered Stablecoin issuer mints and redeems Covered Stablecoins on a one-for-one basis with USD at any time and in unlimited quantities. In other words, a Covered Stablecoin issuer always stands ready to mint a Covered Stablecoin for one USD (or the relevant fraction) and redeem a Covered Stablecoin for one USD (or the relevant fraction), and there is no limitation on the amount of Covered Stablecoins that the issuer mints or redeems.
Covered Stablecoins are minted by the issuer and offered and sold by the issuer or designated intermediaries. Where only a designated intermediary can mint or redeem a Covered Stablecoin, other holders would have to mint/redeem in secondary markets. The market price of a Covered Stablecoin on secondary markets can fluctuate from its redemption price, which allows for investing strategies such as arbitrage.
Marketing of Covered Stablecoins
Covered Stablecoins are marketed solely for use in commerce, as a means of making payments, transmitting money, and/or storing value, and not as investments. Covered Stablecoins are sometimes referred to as “digital dollars.” Marketers highlight the following attributes of using Covered Stablecoins: (i) stable value; (ii) does not receive interest, profit or other returns; (iii) does not reflect any investment or ownership interest in any asset other than the Covered Stablecoin; (iv) does not provide any governance rights; and (v) does not provide a holder with any financial benefit (or potential loss) based on the issuer’s performance. The SEC does not believe that these marketing points result in the Covered Stablecoin being considered a security.
The Reserve
Covered Stablecoin issuers use the proceeds from sales of Covered Stablecoins to acquire assets that are then held in a pooled account, called a “Reserve.” The assets held in the Reserve consist of USD and/or other assets that are considered low-risk and readily liquid so as to allow a Covered Stablecoin issuer to honor all redemptions on demand. Reserve assets are not co-mingled with the issuer’s other assets. In addition, Reserve assets may not be used for: (i) operational expenses or general business purposes; (ii) lending, pledging, or rehypothecating; and (iii) must be held in a manner designed to protect them from third party claims.
Legal Discussion
Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act each defines the term “security” by providing a list of various financial instruments, including “stock,” “note,” and “evidence of indebtedness.” Accordingly, the SEC analyzes Covered Stablecoins looking to both the SEC v. W.J. Howey Co. (the Howey Test) and Reves v. Ernst & Young. For more on Howey and Reves, see HERE.
Although the term “note” is specifically included in the statutory definition of a security, case law has determined that not every “note” is a security. The Exchange Act and SEC specifically exclude notes with a term of less than nine months, the proceeds of which are used for a current transaction, from the definition of a “security.” Moreover, numerous lower courts had carved out exemptions over the years for commercial paper type notes such as purchase money loans and privately negotiated bank loans.
Relying on Howey, many courts developed an analysis based on the risk of the loan. That is, the issue revolved around whether the lender had contributed “risk capital” subject to the entrepreneurial or managerial efforts of the borrower. Relying on Landreth, other courts decided a “note” is a security as it appears in the statutory definition.
Analyzing and bringing together the line of lower court opinions, the U.S. Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990) adopted the “family resemblance” test to determine whether a note is a security.
Under the “family resemblance” test, one must start with the presumption that a note is a security which presumption is rebutted if the note bears a resemblance to one of the enumerated categories on a judicially developed list of exceptions. If the “note” does not bear a resemblance to an item on the list, the analysis continues to determine if a new category should be added to the list.
The following is a list of notes that have judicially been determined to fall outside the definition of a “security”:
(i) a note delivered in consumer financing;
(ii) a note secured by a mortgage on a home;
(iii) a short-term note secured by a lien on a small business or some of its assets;
(iv) a note evidencing a character loan to a bank customer;
(v) a short-term note secured by an assignment of accounts receivable;
(vi) a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized); and
(vii) a note evidencing loans by commercial banks for current operations.
In determining whether a note bears a resemblance to one of the enumerated exceptions to a security, or whether a new exception should be added, the courts consider:
(i) The motivation of seller and buyer – The first factor is described as the motivation that prompts “a reasonable seller and buyer to enter into” the transaction. If the seller’s motivation is to raise money for his/her business and the buyer’s motivation is to earn profits, then the note is likely a security. Even if the note is not necessarily characteristic of a security, if the investor reasonably expected that they were buying a security, and would be protected by the accompanying securities laws, the courts can determine that indeed a security has been sold.
(ii) The plan of distribution of the instrument – The second factor determines whether the instrument is being distributed for investment or speculation. If the note instrument is being offered and sold to a broad segment or the general public for investment purposes, it is a security.
(iii) The reasonable expectations of the investing public – An instrument will be deemed a security where the reasonable expectation of the investing public is that the securities laws (and accompanying anti-fraud provisions) apply to the investment.
(iv) The presence of alternative regulatory regime – The fourth and final factor is a determination whether another regulatory scheme “significantly reduces the risk of the instrument, thereby rendering the application of the Securities Act unnecessary.” The FDIC and ERISA laws are two such examples.
Using this analysis the SEC concludes that Covered Stablecoins are not securities under Reves because (i) the sellers use the proceeds to fund a Reserve and buyers are not motivated by an expected return on their funds; (ii) Covered Stablecoins are distributed in a manner that does not encourage trading for speculation or investment; (iii) a reasonable buyer would likely expect that Covered Stablecoins are not investments; and (iv) the availability of a Reserve adequately funded to fully satisfy redemptions on demand is a risk-reducing feature of Covered Stablecoins. In short, the offer and sale of Covered Stablecoins is to advance a commercial or consumer purpose.
The Howey Test is whether there is an investment of money in a common enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. As discussed herein, Covered Stablecoins are not an “investment” nor is there an expectation of profits based on the efforts of other.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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