Thread by @jchervinsky

0/ The SEC's DLT Framework, through the eyes of a securities litigator.

Okay, so it doesn't answer any big questions about crypto regulation, but if you thought it would, you kind of deserve to be disappointed. I, for one, choose to be (mostly) happy with this thing.

Thread. 👇

1/ I always start my "SEC guidance" threads the same way, and I always will:

The SEC does not make the law. The Framework isn't binding on anyone, not even the SEC itself. SEC lawyers can only decide their own enforcement strategy, but they can be wrong & they can lose in court.

2/ So, what did the SEC give us today?

The Framework is the SEC's long-awaited "plain English" guidance for ICOs, a solid 13 pages (including many legal citations) explaining how the SEC thinks each prong of the Howey test applies to digital assets.
scribd.com/document/40426…

3/ I won't bore you with the details of the SEC's Howey analysis. If you want that, you can read the Framework yourself. It's riveting, I promise. 🤓

Instead, I'll cover what this thing actually means for the industry, how lawyers like me will use it, & what the SEC wants next.

4/ The Framework starts with a simple & clear explanation of the Howey test. You know this by now, right? Tokens are securities if their sale involves:

- an investment of money
- in a common enterprise
- with a reasonable expectation of profit
- based on the efforts of others

5/ It's a nice primer, even if it's nothing new for securities lawyers. But I don't think it's meant for the lawyers--look at who the SEC addressed it to in the first sentence: "If you are considering an Initial Coin Offering, . . . ."

*You* devs. *You* founders. *You* buidlers.

6/ The Framework is "plain English" specifically because it's not "legalese." In their own way, the SEC is trying to connect directly with the industry.

I see a positive message here. The SEC is saying: "we want you to succeed, we just want you to work with us along the way."

7/ The rest of the Framework lays out dozens of characteristics that, in the SEC's view, define whether a digital token qualifies as a security.

Before now, the SEC's go-to resource for this purpose was the 2017 DAO Report, which--all due respect--is useless garbage in 2019.

8/ The DAO Report has bothered me for quite some time. It barely glanced in the direction of the Howey test, and yet the SEC has called it a "detailed legal analysis" on how the securities laws apply to ICOs.

The Report is dead; long live the Framework.
scribd.com/document/35471…

9/ I expect the Framework will feature heavily in both compliance counsel's advice and defense counsel's arguments from this point on.

Take a checklist of all the characteristics listed here--someone's done this already, I bet--and you have solid ground to analyze any given ICO.

10/ So generally, I'm glad that the SEC decided to publish guidance that actually tells us what they're looking for when they look at an ICO.

We may not like what they have to say--they do seem to think everything that exists is a security--but at least they're talking to us.

11/ On that point, the Framework does imply that the SEC thinks ICOs in virtually any form recognizable to today's crypto market should be regulated.

I expect that the Framework will push more ICOs into SAFT-based private placements--sales to accredited investors--going forward.

12/ I also agree with some of my colleagues' critiques of the Framework.

Certain points in the Framework are painfully obvious, while others are painfully vague. Some seem nearly impossible to satisfy, and some, in my view, are dead wrong & would never hold up in court.

13/ For example, my blood boils at the hedge on airdrops in footnote 9:

"[T]he lack of monetary consideration for digital assets . . . does not mean that the investment of money prong is not satisfied; . . . an airdrop may constitute a sale or distribution of securities."

🤬

14/ It defies logic to say you can have "an investment of money" under Securities Act § 2a(1) without anyone investing anything of monetary value.

No surprise, the SEC doesn't cite any case law to support this point. I think they could have done a much better job on airdrops.

15/ The Framework also doesn't go beyond the Howey test, which is important but also fairly well-trodden ground at this point.

How much longer will we wait for the SEC to give us "plain English" guidance on all the other, tougher questions plaguing the crypto industry today?

16/ To give you a few examples of issues I'd rather have guidance on:

- Does the SEC have jurisdiction over offshore ICOs that excluded US citizens?
- What will the SEC do with offshore exchanges open to US citizens?
- Are DEX teams expected to register their code with the SEC?

17/ The Framework concludes with the same invitation that the SEC has now extended with nearly every guidance related to the crypto industry:

"We encourage market participants to seek the advice of securities counsel and engage with the Staff through sec.gov/finhub."

18/ Yeah, the SEC *really* wants to connect directly with industry stakeholders.

That's because, if it wasn't clear by now, the SEC won't be adopting any bright-line rules for crypto. The securities laws depend on the unique "facts and circumstances" of each particular case.

19/ As a result, the only way for the SEC to provide regulatory clarity is on a case-by-case basis, which means one-on-one conversations with crypto companies that need more guidance than they got today.

Of course, talking openly to securities regulators isn't always advisable.

20/ And that's why the Framework was accompanied by the first-ever no-action letter for the crypto industry: the SEC says TurnKey Jet's TKJ tokens are not securities, so the SEC will not pursue an enforcement action.
coindesk.com/sec-issues-fir…

21/ The no-action letter itself isn't too interesting. There's little doubt that TKJ tokens aren't securities. We didn't need a letter for that.

But that's not what it was for. It was another message from the SEC: "if you come talk to us, we'll go easy." If you don't? 🤷‍♂️

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