US businessman Mark Cuban said it is almost impossible to know what qualifies as a security under the current US Security and Exchange Commission (SEC) regulatory regime, citing documents from the financial regulator’s website.
In a June 11 tweetCuban pointed to one SEC document on the application of the Howey test to digital assets, suggesting the regulator has been sending mixed signals.
“None of the elements presented on this page are part of the registration process. That makes it nearly impossible, with or without an army of securities attorneys, to know what is or isn’t security in the crypto universe.”
SEC’s Digital Assets Framework
The SEC’s 13-page document titled “Framework for ‘Investment Contract’ Analysis of Digital Assets” provides crypto companies with guidance on how to determine whether federal securities laws apply to their digital assets.
The SEC document explains how to apply the Howey test to digital assets to determine the status of their investment contract and how to reassess assets previously classified as securities.
According to the SEC filing, digital assets with fully developed and operational distributed ledger networks and assets used as methods of payment or for their intended functionality are generally not considered investment contracts. However, it provides that an asset may be an exception if:
the digital asset is offered or sold to buyers at a discount to the value of the goods or services; the digital asset is offered or sold to buyers in quantities that exceed fair use; and/or there are limited or no restrictions on resale of those digital assets, particularly where an AP continues its efforts to increase the value of the digital asset or has facilitated a secondary market.
The Commission added a caveat that “these factors are not intended to be exhaustive
evaluate whether a digital asset is an investment contract or another type of security, and no single factor is determining. The document also contains extensive footnotes explaining the position.
SEC Enforcement Actions
SEC Chairman Gary Gensler has described all digital assets except Bitcoin (BTC) as securities and highlighted crypto companies’ non-compliance. Under Gensler, the SEC has more than labelled 60 cryptocurrencies, such as SOL, MATIC, ADA, BNB and others, as securities.
These enforcement actions have generated strong reactions from various crypto stakeholders challenging this broad classification and demanding regulations tailored to their industry. However, Gensler has maintained that existing securities laws adequately regulate the space for digital assets.
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