Thread by @katherineykwu

🚨 THIS IS HUGE: the SEC just released an official statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets” analyzing whether a digital asset is a security or not

READING NOW WILL POST ANALYSIS HERE STAY TUNED

WAIT THEY ALSO ISSUED A NO ACTION LETTER oooh boy my morning is about to get REAL NERDY

1/ So first: the no action letter says that the SEC will *not* recommend any action for a token sale for this company called TurnKey Jet (TKJ), because TKJ relied on their counsel's opnion that TKJ tokens are not securitie, and thus offered and sold tokens without registering.

2/ TKJ is a small air carrier/operator and owns like 2-3 jets. They launched their own internal token platform to facilitate transactions between the user, brokers (of the flights), and carriers. They also have their own wallets.

idk why this has to be on a blockchain but ok

3/ According to TKJ: The Tokens are nonrefundable. Consumers can only redeem their Tokens for air charter services. And TKJ follows all AML reporting. And it's only for members (everyone has to sign a user agreement)

4/ Based on a VERY rough summary of the facts, this is basically a small airline that offered a membership program to its members but made it fancy by adding smart contracts (why??) and put it on the blockchain (also whyyy??)

5/ So the SEC said they won't enforce action if:

+ each token will be fully developed and operational at the time any are sold, and the token sale funds won't go to developing the platform/network/ app

5a (cont)

+ the Tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold

+ TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform

5b (cont.)

+ TKJ will sell Tokens at a price of one USD per Token throughout the life of the Program, and each Token will represent a TKJ obligation to supply air charter services at a value of one USD per Token

wait lmao so like a USD pegged stablecoin what

6/
My thoughts:

I was initially excited about this no-action letter, but now I'm realizing its just the SEC saying 'well we aren't going to enforce action since you sold USD- pegged loyalty points for your small air carrier company to your members'

TY SHERLOCK

7/ Sass aside, read for yourself here:

No-Action letter from the SEC sec.gov/divisions/corp…

TKJ's original letter sec.gov/divisions/corp…

8/ Onto the SEC's digital asset framework!!

9/ The digital asset framework was written mostly by Director Hinman (made famous by his 'ether may not be a security' speech last summer) and Valerie Szczepanik (she heads up their digital asset division).

Link is here: sec.gov/files/dlt-fram…

10/ First page and a half:

a brief explanation of the Howey test, if you sell a security, you must register, we don't care about the form; the information that you disclose must be true, etc.

I know you all know this already, so am glossing over the introduction.

11/ We know already that each analysis is highly dependent on the facts and circumstances. The first two elements of the Howey test are also the easier ones to analyze: did you sell tokens for $$, and was there a central team developing it? The SEC thinks that most cases, yes.

12/ The third prong of the Howey test *i.e. Reasonable Expectation of Profits Derived from Efforts of Others", is the more complicating factor.

Some important considerations: reliance on others to make your tokens more valuable is generally what they mean by this.

13/ If you, as the purchaser of the tokens-- reasonably rely on others-- SEC defines it as a promoter, sponsor, or other third party (or affiliated group of third parties) -- to take on significant developments/ changes to the network, that meets most of it. *Keyword: affiliated*

14/ The SEC does acknowledge that development and the like may be done by a decentralized network. but if you have a core team that really does most of the development, improvement (or enhancement), operation,
or promotion of the network, that's when you need to be careful.

15/ An affiliated party are those who created a market for the price of the digital assets (ie limiting supply through buybacks, burning), or plays a lead or central role in deciding governance issues, code updates, etc.

16/ Points 13-16 really is to say: the SEC has some ideas as to what a 'decentralized network' looks like, and if you have a team who not only issues, sells, and promotes the tokens but also engages in the above, that's (obviously) not decentralized enough.

17/ Let's now move onto "Reasonable Expectation of Profits" bc lol this fund never ends (and now that I am accountable I can't give up half way)

18/ Under the Howey test, if an asset price appreciates as a result solely from external market forces (such as general inflationary trends or the economy), that's not profit. I'm not going into all the factors, but think about what DRIVES your token price appreciation.

19/ Some pretty obvious examples (translating the legalese): If you, as an issuer, successfully shill tf out of your tokens, that's creating a reasonable expectation of profit for your bagholders. If you as an issuer create a trading market for the token, same thing.

20/ Important question: what if the token sale was a security (and you didnt register), but now you truly think that your tokens should be re-evaluated since you really don't think it's a security in its form today? *uhemETHERuhem*

Consider these factors then:

21/ To wrap it up, what are some things that make the tokens LESS likely to be a security under the Howey test?

+ both network and token fully functional and decentralized.
+ Prospects for appreciation in the token are limited (ie people dont expect to HODL for $$$)

21a/

+ token holders can immediately use it for its intended functionality
on the network

+ if the issuer facilitates the creation of a secondary market, transfers of the digital asset may only be made by and among users of the platform

21b/

There are more factors to consider re: is the token less likely to be a security, and I won't copy paste or paraphrase them here, but its in page 9-10 of the framework sec.gov/files/dlt-fram…

(real talk im tired)

22/ IN CONCLUSION, the framework is definitely a cumulation of the cautionary lessons that we've learned from the SEC's past enforcement actions (don't shill your token $ value, actually develop a usable token, have a real plan to decentralize out your team, etc).

23/ Most important: consult a real and reputable lawyer if you feel stuck or confused!!!!!! (Which is not me, and none of this is legal advice, and tbh if you're taking legal advice from twitter idk what to tell you)

ty for coming to my ted talk, hope this was fun+kinda helpful

To no one's surprise, I had more feelings about this (another 3,000 words worth of feelings, actually!!), so I wrote a blog post last night. If you'd like a deeper dive beyond this tweet thread of the SEC's framework + no action letter, give this a read!

katherinewu.me/writings/sec-c…

🧧 Gotta shoot my shot- if you like my ramblings I also accept Bitcoin + Eth donations at the following addresses:

Bitcoin: 1G1PrpWe2dgT9TK9Xvmc7Fgcp2qB7cjXcx
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THANKS GUYS ILY REGARDLESS ❤️