SEC Division of Corporation Finance Director Discusses Digital Assets, Opines That Ether and Bitcoin Are Not Securities
Speaking at the Yahoo Finance All Markets Summit on June 14, 2018, SEC Division of Corporation Finance Director William Hinman discussed the question of whether a digital asset that is initially offered as a security can eventually become something other than a security. Director Hinman offered his notable opinion that the circumstances surrounding a digital asset may over time remove it from being classified as a security and thus subsequently result in exemption from the normal framework of federal securities law.
Acknowledging that it may at times seem easy to label a digital asset transaction as a security offering according to the “investment contract” test posited in SEC v. Howey (which considers if a transaction involves an investment of money in a common enterprise with an expectation of profit derived from the efforts of others), Director Hinman suggested that a digital asset transaction’s true classification depends on how the digital asset is being sold and the reasonable expectations of purchasers, as well as the economic, practical, and other types of circumstances involved.
Director Hinman clarified, “If the network on which the token or coin is to function is sufficiently decentralized … the assets may not represent an investment contract.” In such situations, a third party’s efforts are no longer as critical to the enterprise’s success, as the imbalance in material information has been reduced. In this context, Director Hinman recognized the distinction between the initial sale of a digital asset, which may be a securities offering, and a subsequent sale at some later point in time which, due to the degree of decentralization achieved, no longer requires the protections of the securities laws. While this analysis had been alluded to in previous Commission remarks, this is the first time such a position has been formally stated by the Staff.
Providing examples, Director Hinman remarked that Bitcoin today does not involve a central third party, and thus the “disclosure regime of the federal securities laws … would seem to add little value.” Notably, he went on to state that “based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”
Instead of utilizing a one-size-fits-all approach for digital assets, Director Hinman advocated for considering various factors and questions when determining whether a digital asset transaction qualifies as a securities offering. Director Hinman emphasized that the SEC and its staff are willing to help those involved in the digital asset industry conduct such analysis and comply with the federal securities laws, declaring that the SEC is prepared to provide additional interpretive or no-action guidance about the proper characterization of digital assets.
Overall, Director Hinman’s remarks indicate the SEC’s evolving perspectives on digital assets within the sphere of federal securities regulation, and as a result, the blockchain industry can look forward to the realistic possibility of other positive developments taking place in the near future.