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Following the Howey Test that determines whether certain transactions qualify as ‘investment contracts,’ there’s new framework recently suggested by two SEC Commissioners and published on the SEC’s official website. The new “Framework for ‘Investment Contract’ Analysis of Digital Assets” will enable individuals and organization to understand whether the digital assets and related services they are offering could be considered as investment contracts or not.
The public statement about the issue clarifies that the new framework is only the representation of the SEC commissioners’ views and perspectives, and it should not be taken as a rule, regulation, or statement of the U.S. Commission.
Two staff members of the SEC have made significant efforts behind the creation of this new framework: The director of the SEC’s Division of Corporation Finance Bill Hinman and the Commission’s Senior Advisor for Digital Assets and Innovation Valerie Szczepanik (who recently expressed her views regarding stablecoins). According to these two SEC commissioners, the newly created framework isn’t something you can rely on to get legal advice, but rather it is an analytic tool that individuals and startups can use to determine whether their ICOs and token issuing apply to the definition of a security under the U.S. federal securities laws.
The official statement further states that the new framework doesn’t replace or modify the existing rules, regulations, and laws. Hence, the market participants are suggested to consult with the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) where all previously published documents are available.
With this new framework, the SEC is aiming to educate individuals and business entities that are associated with blockchain-based financial technologies and new digital methods of raising capital. As per the SEC guidelines, whether the market participants should be aware that the activities they are engaged with fall under the federal securities laws. Furthermore, it also establishes that it is a must for market participants to get registered with the SEC and even if not registered, it is necessary for them to know that the digital assets they are offering are subjected to the SEC’s jurisdiction.
The information within the new framework applies to the individuals and business entities who are associated with the offering, selling, distributing, and marketing cryptocurrencies. Additionally, businesses that offer exchange and trading facilities, crypto traders and investors, and experts that offer financial services such as management or advice and other professional services can also benefit from the framework in terms of determining whether their offerings are considered as investment contracts and therefore a security.
With or after employing this analytic tool, if the market participants have any confusion regarding the services they offer can be considered as security or not, they can get in touch with the SEC staff through this FinHub’s webform.