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Howey Test

Non-Fungible Tokens

This one has been on my list for a while and I’m finally ready to dive in – non-fungible tokens (NFTs).  In July 2017, the world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector, when the SEC issued its Section 21(a) Report on the DAO investigation finding that a cryptocurrency is, in most cases, a security HERE.  The SEC’s Section 21(a) Report relied on the analysis in SEC v. W.J. Howey Co. to determine when a crypto is a security, building the guardrails to conclude that all, or almost all, cryptocurrencies at that time were/are indeed a security.  For more on the Howey analysis, see HERE.

Later in June 2018, the SEC gave some relief to the crypto world by announcing that Bitcoin and Ether were likely decentralized enough as to no longer be considered a security, hedging on the conclusion as

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March 15, 2022

SEC Cracking Down on The Crypto Wild West and Other Digital Asset Updates

After a few years of relative dormancy, the SEC is once again targeting the flourishing cryptocurrency market.  On August 3, 2021, SEC Chair Gary Gensler gave a speech to the Aspen Security Forum in which he referred to the cryptocurrency marketplace as the Wild West.  Days later, the SEC filed its first case involving securities using DeFi technology and then a few days after that, reached a $10 million settlement with Poloniex for operating an unregistered digital asset exchange.  Shortly after that, the SEC took aim at Coinbase’s planned crypto lending program causing the crypto giant to shelf the business model for the time being.  SEC Commissioners are joining in, giving speeches in various forums focused on crypto and the regulatory environment.

Background

In July 2017, the world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector, when the SEC issued its Section 21(a) Report on

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November 2, 2021

Hester Peirce Proposal For Treatment Of Cryptocurrency

SEC Commissioner Hester M. Peirce, nicknamed “Crypto Mom,” has made a proposal for the temporary deregulation of digital assets to advance innovation and allow for unimpeded decentralization of blockchain networks.   Ms. Peirce made the proposal in a speech on February 6, 2020.

The world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector with the SEC’s announcement that a cryptocurrency is a security in its Section 21(a) Report on the DAO investigation. Since then, there has been a multitude of enforcement proceedings, repeated disseminations of new guidance and many speeches by some of the top brass at the SEC, each evolving the regulatory landscape.  Although I wasn’t focused on digital assets before that, upon reading the DAO report, I wasn’t surprised.  It seemed clear to me that the capital raising efforts through cryptocurrencies were investment contracts within the meaning of SEC v.

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March 3, 2020

The SEC, FinCEN And CFTC Issue A Joint Statement On Digital Assets

On October 11, 2019 the SEC, FinCEN and CFTC issued a joint statement on activities involving digital assets.  Various agencies have been consistently working together, with overlapping jurisdiction, on matters involving digital assets and distributed ledger technology.  Earlier, in August, the SEC and FINRA issued a joint statement on the custody of digital assets, including as it relates to broker-dealers and investment advisors (see HERE).

The purpose of the joint statement is to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA).  AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN (for more information on MSBs see HERE), and broker-dealers and mutual funds obligated to register

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November 5, 2019

SEC And FINRA Joint Statement On Custody Of Digital Assets

On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel issued a joint statement on broker-dealer custody of digital asset securities (“Joint Statement”).  The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years.  For example, issues surrounding the custody of digital assets have been continuously cited by the SEC as one of the reasons for the failure to approve a cryptocurrency ETF.

The Joint Statement begins with the admission that historical rules do not adequately cover the complex issues related to digital assets, including rules related to the loss or theft of a security.  In recent months the SEC and FINRA staff have been engaging in conversations with industry participants regarding how the rules could be applied or modified to suit the needs of the emerging technology of digital assets.

Any entity that transacts business in digital asset securities must comply with the federal securities

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August 6, 2019

Are Smart Contracts Enforceable

I’ve mentioned the term “smart contract” numerous times in my blogs related to blockchain and distributed ledger technology.  It seems worth drilling down on what exactly a “smart contract” is and whether such a “contract” is enforceable as a legally binding contract.  Smart contracts are generally computer code designed to automatically execute all or part of an agreement that is stored on a blockchain, such as the automatic transfer of assets upon the completion of specific programmed criteria.  A smart contract may be the only agreement between parties, or it may be used to implement all or part of the provisions of a separate written contract.

Since a smart contract is programmed code, it will only perform each step or item of execution when the pre-programmed criteria has been completed.  That is, if “x” occurs, then the code will automatically execute step “y.”  Accordingly, all contractual actions must be capable of being completed within

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July 30, 2019

FinCEN Guidance On Cryptocurrency

In May 2019, the Financial Crime Enforcement Network (FinCEN) issued a thirty-page comprehensive review of its regulations as pertains to convertible virtual currencies.  Previously, in February 2018, FinCEN stated that it expects issuers of initial coin offerings (ICOs) to comply with the Bank Secrecy Act (BSA), including its anti-money laundering (AML) and know your customer (KYC) requirements (see HERE).

In general, entities that are subject to the BSA must: (i) register with FinCEN as a money services business (MSB); (ii) prepare a written AML compliance program that is designed to mitigate risks, including AML risks, and to ensure compliance with all BSA requirements including the filing of suspicious activity reports (SAR) and currency transaction reports; (iii) keep records for certain types of transactions at specific thresholds; and (iv) obtain customer identification information sufficient to comply with the AML program and recordkeeping requirements.

Although the new guidance does not establish any new regulatory requirements, it is the first time

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July 16, 2019

SEC Establishes Analysis Matrix for Digital Assets

On April 3, 2019, the SEC’s Division of Corporation Finance published a “Framework for Investment Contract Analysis of Digital Assets,” issued a No-Action Letter to Turnkey Jet, Inc. and made a statement on both. Although all guidance is appreciated, there is really nothing new or different about the analysis, which is firmly based on SEC v. W.J. Howey Co. (the “Howey Test”).  Moreover, as discussed below, even though the SEC found that Turnkey Jet did not need to comply with the federal securities laws in the issuance and sales of its tokens, the opinion and issued guidelines do not go far enough and still leave a great deal of uncertainty.

Framework for Investment Contract Analysis of Digital Assets

The SEC’s framework sets forth facts and circumstances to be considered in applying the Howey Test to determine if a digital asset is an investment contract and thus a security subject to state and federal securities laws in its

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April 16, 2019

What Is A Security? The Howey Test And Reves Test

ABA Journal’s 10th Annual Blawg 100

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Sometimes it’s good to go back to basics.  In my blogs I often refer to the registration and exemption requirements in the Securities Act of 1933, as amended (“Securities Act”).  Section 5 of the Securities Act makes it unlawful to offer or sell any security unless a registration statement is in effect as to that security or there is an available exemption from registration.  Similarly, I often refer to the broker-dealer registration requirements.  To be a “broker” or “dealer,” a person must be engaged in the business of effecting transactions in securities.

In today’s small cap world corporate finance transactions often take the form of a convertible note and/or options and warrants, the conversion of which relies on Section 3(a)(9) of the Securities Act.  Section 3(a)(9) is an exemption available for the exchange of one security for another (such as a convertible note for common stock).  Likewise, Rule 144(d)(3)(i) allows the tacking of

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November 25, 2014

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