Wednesday, August 12, 2020

SEC Announces that Ether and BitCoin are Not Securities

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Jeffrey Marks
Jeffrey Marks is corporate attorney and partner at Alliance Legal Partners, Inc. (www.alliancelegalpartners.com), and also serves as Of Counsel for Fortis LLP (www.fortislaw.com). He is licensed to practice law in the states of California and Nevada. His practice is focused on private placements, crowdfunding transactions and general corporate and real estate transactional work, including corporate buyouts, mergers and acquisitions, joint ventures and fund formation. Mr. Marks previously practiced law at Paul, Hastings, Janofsky & Walker, LLP, and served as in-house counsel to FutureLink Corp.

The crypto community has long awaited a statement by the SEC on whether BitCoin and Ether constitue securities.  On June 14, 2018, at Yahoo Finance’s Crypto Summit in San Francisco, William Hinman, the SEC’s Director of Corporate Finance, announced that the SEC will not classify Ether and BitCoin as securities. Hinman indicated that Ether and BitCoin fail the prong of the Howey test that requires that investors have an expectation of profits arising from a common enterprise which depends solely on the efforts of a promotor or third party, stating that “if a cryptocurrency network, such as BitCoin or Ether is sufficiently decentralized and purchasers no longer have a managerial expectation from a third party,” it is not a seucirty. 

Hinman stated that the manner in which a digital asset is sold, promised, and behaves, is the key deciding factor.  Interestingly, he stated that previously, Bitcoin and Ether may have been offered as securities (like shares of a company), which would have required registration with the SEC, but “a consensus has emerged that those cryptocurrencies behave and are treated like commodities, similar to gold and oil.” This highlights SEC Chairman Clayton’s statement in April that “just because its a security today doesn’t mean it’ll will be security tomorrow . . .”

Last week in an interview with CNBC, Clayton seemed to affirm his position that most ICOs involve the sale of securities, despite arguments that certain tokens offered through ICOs should not be classified as securities because of their “utility.”  As evident from Clayton’s comments over the past few months, however, the SEC is not looking to crush the cryptocurrency industry, but rather to protect investors from attempts to evade securities laws which were enacted to protect investors from fraud.  In fact, earlier this month, Clayton said that companies are free to sell tokens in a private placement or through a public offering, if they follow the private placement rules or the public offering rules.  He further stated that the SEC is “happy to help” in those endeavors. Clayton’s statements support my view that issuers have no reason to fear engaging in token offerings if they conduct their offerings in compliance with securities laws.  

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