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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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On April 3rd, 2019, the U.S. Securities and Exchange Commission’s (SEC or Commission) Strategic Hub for Innovation and Financial Technology (FinHub), which launched in October 2018, published a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security. Its statement on the framework of an “investment contract” coincides with the Division of Corporation Finance (Division) issuing a response to a no-action request, indicating that the Division will not recommend enforcement action to the Commission if the digital asset described in the request is offered or sold without registration under the U.S. federal securities law.

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The no-action letter issued to TurnKey Jet, Inc. (TKJ) outlines certain facts dispositive to the Division’s statement that it would not recommend enforcement if TKJ offers and sells its tokens without registration and sets forth a very narrow definition of a token which is not an investment contract/security (sometimes referred to as a “utility token”):

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While this fact pattern includes several conditions, the issuance of this first no-action letter in the space is significant, and we expect additional no-action requests to be addressed by the Division.

To assist market participants, FinHub issued the <a href="https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets" target="_blank" rel="noopener">framework</a>, which, alongside the <a href="https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1.htm" target="_blank" rel="noopener">TKJ no action letter</a>, is intended to be an analytical tool to help assess whether the federal securities laws apply to the offer, sale or resale of a particular digital asset.

FinHub starts the framework by confirming that the “Howey test” outlined in the U.S. Supreme Court’s Howey case[1] and subsequent case law remain the applicable standard to determine whether the sale of such digital assets constitutes the sale of securities. Most typically, FinHub expects the digital asset would fall into the category of an “investment contract,” which exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. The framework explores aspects of digital asset transactions and provides valuable guidance under each prong of the Howey test for analyzing such transactions, noting, “the focus of the Howey analysis is not only on the form and terms of the instrument itself (in this case, the digital asset) but also on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold.”

Not surprisingly, the analysis presented suggests that most digital asset transactions do implicate federal securities laws. However, the guidance suggests that even though the initial sale of a digital asset may constitute the sale of an investment contract, the character of such digital asset or resale transaction may change over time due to intervening facts and circumstances. Along these lines, the framework contains different or additional points for consideration with respect to the “efforts of others” and “reasonable expectation of profits.” This opens the door for an initial securities offering of a token that later may not be treated as a security.

The framework also includes several “consumption” characteristics (consistent with TKJ), the presence of which make it “less likely the Howey test is met”:

While this guidance represents staff views and is not a rule, regulation or statement of the Commission, you can request a fintech-related meeting with SEC staff or view other publications at <a href="https://www.sec.gov/finhub" target="_blank" rel="noopener">https://www.sec.gov/finhub</a>.

Cassandra W. Borchers 513.352.6632 <a href="mailto:Cassandra.Borchers@ThompsonHine.com">Cassandra.Borchers@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.&nbsp;

[1] SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (“Howey”). See also United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975) (“Forman”); Tcherepnin v. Knight, 389 U.S. 332 (1967) (“Tcherepnin”); SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943) (“Joiner”).

https://admin.thompsonhine.com/wp-content/uploads/2022/04/Investment_Management_Update_-_SEC_Grants_No-Action_Relief_for_ICO.pdf

SEC Grants No-Action Relief for Initial Coin Offering

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