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HOT OFF THE PRESSES: #SEC Framework for #Investment Contract #Analysis of #Digital #Assets: sec.gov/news/public-st…
here's a link to the actual doc- 13 pages long sec.gov/files/dlt-fram…
Here's the analysis- note that "another type of consideration" for payment prong is broad and explored further in fn9 to include non monetary consideration including #airdrops
Reliance on others prong- introduces AP or Active Participant, sweeps in promoters, sponsors or 3rd parties who provide "essential managerial efforts that
affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts. 1/2
uses an objective standard, focused on the transaction itself and the manner in which the digital asset is offered and sold; enumerates a number of non-dispositve factors to be considered focused on reps made to buyers, expectations of buyers based on reps, 1/2
whether AP's efforts undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise; AP is responsible for technical development, whether tasks are to be completed by the AP or a decentralized set of users, making a market2/3
controls issuance/creation/controls supply (i.e. burning or buybacks), has a "lead or central role" in development of system, including governance, code updates, validation of transactions; continuing managerial role in the operation of the network (i.e. deploying funds raised3/4
deciding where the asset will trade, compensating those who provide services to the network, "other managerial judgments," where AP has personal stake in venture, where venture pays its people with its assets, AP owns the venture's IP, or AP monetizes the venture's assets;
NEW: Guidelines for evaluating whether efforts of others still applies (Hinman!): Looks at continuing impact of efforts of others: does an AP or "successor AP" continue to be important to the value of an investment in the digital asset, would purchasers reasonably expect an AP1/2
to carry out essential managerial or entrepreneurial efforts, does AP's efforts continue to affecting the enterprise’s success? Nothing so far about when it is appropriate to conduct this analysis, who should conduct this analysis and who decides...
expectation of profits: solely from macro factors like inflation generally not enough, but expectation of market appreciation or profit participation usually enough. share of profits or capital gains enough. Tradeable or expected to be tradeable enough. offered broadly vs. to 1/2
offered to prospective users in quantities that reflect use; little correlation in offer price/use value or price; little correlation in trade volumes /use volumes; raise beyond what's needed to launch product (lol!) AP benefits by holding same class as buyers; AP spends funds2/3
raised to continue to build the network/functionality; raise marketed based on claim that AP can grow the network; marketed generally like an investment; use of proceeds to develop network; AP will deliver future functionality; promise of future network; ready transferability 3/4
of asset; profitability/appreciation of network/asset promoted; market for trading asset;
New: When evaluating whether a digital asset previously sold as a security should be reevaluated at the time of later offers or sales, Purchasers no longer reasonably expect that continued dev. efforts of an AP will be a key factor for determining the value of the digital asset;
"direct and stable" correlation btwn value of asset and value of
the good or service for which it may be exchanged or redeemed; trading volume reflects the level of demand for the
good or service for which it may be exchanged or redeemed;
holders are then able to use the asset for its intended functionality, (i.e. acquire goods and services on or through the network or platform); Whether any economic benefit that may be derived from appreciation in the value of
the digital asset is incidental to obtaining
the right to use it for its intended functionality; No AP has access to material, non-public information or could otherwise be deemed to hold material inside information about the digital asset. Phew. At first glance, doesn't look good for those who want #Ethereum to trade freely
Other considerations: "economic realities" factors, including factors suggesting not a security: network & asset are developed and operational, holders can use functionality of system, structured for use not speculation, prospects for appreciation of asset is limited 1/2
If offered as a virtual currency, can immediately be
used to make payments "in a wide variety of contexts," or acts as a substitute for real (or fiat) currency. (Does this mean adoption must occur prior to issuance??)
Continued: "This means that it is possible to pay for goods or services with the digital asset without first having to convert it to another digital asset or real currency."If characterized as a virtual currency, the digital asset actually operates as a store of value ...
if asset = entitlement to good/service, can access the good/service on the platform network, correlation btwn asset price/market
price of good /service, asset sold in quantities related to consumptive intent; asset available in increments that correlate with a consumptive
intent to consume the asset more evident if the good/ service can only be acquired/more efficiently acquired, via the asset on the network; economic benefit derived from appreciation in value of the asset is incidental to right of use for its intended functionality.
Asset marketed to emphasize functionality & not potential for appreciation in market value ; Potential purchasers can use the network & use (or have used) the
digital asset for its intended functionality.
Restrictions on the transferability of the asset consistent with the asset’s
use & not facilitating a speculative market; if the AP facilitates the creation of a secondary market, transfers of the digital asset may only be made by & among users of the platform.
if there's a usable asset, but the network is being developed/improved, may still be a security if the asset is offered /sold at a discount to the value of the goods or services; the asset is offered /sold in quantities that exceed reasonable use; limited /no resell restrictions
particularly where an AP is continuing in its efforts to increase the value of the digital assets or has facilitated a secondary market. In closing:
These are more factors but not the only ones, no single factor is determinative, the SEC wants you to talk to get lawyers and to communicate with the SEC on Finhub.
Overall, what's new: Clearer guidelines as to what amounts to a "functioning" network, smart consideration of sales of tokens for consumption in quantities that reflect use/consumption, not trading. AP concept may have 1st amendment implications @WinstonOnoWales @MattKohen
We have more data/clearer data of what's to be considered when a post- issuance security is reviewed to determine if it's still a security, but we are missing critical points- who decides, when its it decided, when is it appropriate to ask, who do you ask, how do you ask?
I expect tons of volunteer analysis of what this means for #ethereum- the hinman-esque factors don't seem incredibly helpful IMO. But i'll withhold judgment until I have time for deeper contemplation
and for those clamoring for certainty: it's just another press release, not a rule, law, ordinance, or even guidance. It'll be another way for lawyers to analyze offerings and make arguments, but this doesn't create the checklist that so many have begged for- which makes sense.
Digital assets are a broad novel spectrum of evolving technologies and even 13 pages of well thought out questions by experts cant possibly ask all of the right questions for every possible emerging combination of tech/fundraising.
the SEC says so: They know this tech is changing and dynamic
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