The staff of the SEC’s Division of Corporation Finance discussed token sales/ICOs and blockchain technology during the first day of the PLI “SEC Speaks in 2018” conference. Below is an overview of the discussion.
- The Division is engaged in ongoing outreach. They want to meet with issuers and investors in the token space. The staff emphasized that they want to encourage issuers “who want to do things the right way,” meaning they want issuers to conduct coin offerings in a manner that complies with the federal securities laws. The staff recognizes the potential of blockchain technology and wants to be “careful” with respect to its regulatory touch.
- The staff acknowledged that token sales present difficult issues under the federal securities laws. They reiterated that the staff applies the Howey test to token sales and analyzes the economic substance of such sales. In the staff’s view, token sales that could result in capital appreciation for token purchasers likely involve the issuance of securities subject to SEC jurisdiction, even if the issuer views the tokens as utility tokens.
- Tokens issued for consumptive purposes, i.e., solely to be used on the issuer’s platform could, in theory, be utility tokens and not securities. Marketing of the tokens plays a key role in the eyes of the staff. Token sales marketed to persons who have no intent to utilize the utility of the tokens clearly involve the issuance of securities, in the staff’s view.
- The staff conceded that some tokens could be hybrid instruments, meaning that they could be both securities and utility tokens. The staff would welcome dialog on navigating the process of issuing hybrid tokens, as well as other types of tokens.
- Finally, the staff reiterated that it has high expectations of “gatekeepers.” The staff expects lawyers, in particular, to apply rigorous analysis in advising issuers on the securities law implications of token sales.
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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking. This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.