The U.S. Securities and Exchange Commission has released a new framework to help cryptocurrency companies and industry players determine whether a particular digital asset is offered and sold as an investment contract, making it a security.
While the framework signals that the SEC is paying attention to the space and is open to further conversation, it falls short of providing clear guidance that companies and their advisors had hoped for, guidance that clearly indicates how securities laws apply to cryptocurrency companies and what they must do to comply with securities law. Instead, the framework adds more ambiguity to an already somewhat murky landscape.
Read on for our initial takeaways from the framework and steps your company should take.
What the Framework Covers
According to the SEC, their new guidance may apply to the following activities related to digital assets:
- Offering, selling, or distributing
- Marketing or promoting
- Buying, selling, or trading
- Facilitating exchanges
- Holding or storing
- Offering financial services such as management or advice
- Other professional services
Impact & Key Takeaways for Companies
- Additional Ambiguity to Navigate: As noted above, the framework doesn’t provide companies with clear guidance delineating how securities laws apply to cryptocurrency companies and what they must do to comply with securities law. For example, the SEC highlights a number of factors, but doesn’t describe how these various factors should be weighted. Ultimately, in some respects, the framework leaves companies with more questions than before its release. Additionally, financial institutions and venture capital firms may be more reticent to become involved in the space, due to perceived lack of clarity on how they can do so safely and legally. In light of this ambiguity, companies in the space should work closely with their lawyers to carefully develop policies and work toward compliance.
- Guidance, Not Law: It is important to note, as the SEC itself emphasized, that this framework is not law. However, companies should certainly take it seriously as it reflects current SEC thinking about these topics.
- Risk of Innovation Being Pushed Abroad: Some may fear that the gray regulatory landscape may lead more token issuers to avoid the United States. However, in our view, ultimately, any friction caused by this framework will not significantly impact American innovation and investment in the space. Industry leaders should certainly do what they can to encourage the SEC to provide additional clarity to help make the U.S. an even more hospitable place for crypto innovation, but regardless, U.S. innovation in this industry will continue to thrive.
- Opportunity for Companies & Industry Leaders to Campaign for Additional Clarity: While from a legal and practical perspective, the new framework may create additional challenges, it is also encouraging on some levels. Through the framework, the SEC signals that it is seeking to understand the industry and is being transparent about the myriad factors it is considering, inviting further conversation on what regulations make sense. Those in the industry have an opportunity to contribute to this conversation, advocating for policies that are fair, thoughtful and practical.
Looking ahead, we anticipate the SEC will issue additional guidance that provides more clarity, as the agency receives feedback and develops its thinking around the complex legal and regulatory questions raised by cryptocurrencies. In the meantime, companies will need to be more thoughtful about how to structure their businesses and approach activities like securities offerings.
To learn more, read the full framework on the SEC website. Also see Fenwick securities enforcement co-chair Michael Dicke’s Q&A in The Recorder, which covers the new guidance, as well as current litigation trends involving digital assets and cryptocurrency.
If you have questions about the new framework or related issues, please reach out to Fenwick blockchain co-chairs Andy Albertson and Dan Friedberg or other members of the Fenwick team.