The regulatory and legal framework for security tokens

The regulatory and legal framework for security tokens

• How do we fit security tokens as a new asset class into the existing regulatory framework for the regulation of securities. That's what the SEC has been trying to do over the last three years in dealing with these assets.

• There will certainly be adjustments to regulation over time, but there is a framework for how securities are offered, how securities are traded, how securities are held, how securities are marketed. If a digital asset is a security, then that framework should apply.

• It is a lot easier, because this is a new type of asset. It has some indicia of a traditional security but it also has characteristics of a different kind of economic arrangement between the holder and the issuer of that asset.

• The SEC's approach to date has been started with, and we think rightfully so, getting rid of fraud.

• It is said that that, in 2016, 2017, as the price of Bitcoin increased almost exponentially, there was a great deal of enthusiasm for the potential, what was seen as the potentially transformative properties, of digital assets and initial coin offerings as being the new way to raise capital outside of traditional channels and without the involvement of traditional intermediaries.

• That motivated a large number of, in many cases, unscrupulous actors and in other cases, obviously, good faith actors to become interested in initial coin offerings as a capital-raising mechanism or a new way to structure their business.

• The SEC focused early on defining digital assets that might be securities in a way that is quite broad using the traditional catchall test that has emerged under a body of Supreme Court jurisprudence, focusing on a test called the SEC vs. W.J. Howey Co. This is a catchall test for an investment when an arrangement or structure or transaction constitutes an investment contract.

• The SEC deployed this weapon to address what it saw as investors essentially getting ripped off and the prevalence of fraud in the space.

• Over time, the SEC's focus has shifted somewhat from policing issuers with potentially obvious fraud, shall we say, or in some cases, that's arguable, but at least policing offerings that have the indicia of fraud to policing cases where issuers have issued tokens in violation of the securities laws but not necessarily involving fraud.

• So, making more technical violations of the securities laws and not necessarily engaging in wrongdoing vis-à-vis their investors other than not registering with the SEC.