On April 3, the U.S. Securities and Exchange Commission (SEC)'s Strategic Hub for Innovation and Financial Technology (FinHub or Staff) released its much-anticipated guidance, the Framework for "Investment Contract" Analysis of Digital Assets (Framework), regarding its views on factors to consider in applying the Howey test to digital assets.1 In conjunction with the Framework, the SEC's Division of Corporation Finance published its first no-action letter in connection with the sale of digital assets, providing relief to TurnKey Jet, Inc., for its proposed token sale (No-Action Letter).
The Framework is based on an amalgamation of sources, including these:
(i) Federal Court Decisions. The U.S. Supreme Court established the longstanding test for determining whether a particular arrangement is an investment contract -- where there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others -- in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey). Subsequent decisions at the U.S. Supreme Court and U.S. Circuit Court level have applied the Howey test and further refined the law.2
(ii) SEC Enforcement Reports and Orders. In July 2017, the SEC issued the Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017) (DAO Report). Based on the SEC Division of Enforcement's investigation into the DAO, the Commission determined that the digital assets at issue were securities under the federal securities laws and, accordingly, must comply with those laws.3 Subsequently, the SEC instituted proceedings
1 In an effort to provide clarity regarding the definition of digital assets under the Securities Act, Rep. Warren Davidson reintroduced on April 9, 2019 a bill first introduced during the previous congressional session that would define and exempt certain digital assets from the definition of security under the federal securities laws, HR 2144 (Token Taxonomy Act). 2 In the Framework, the Staff specifically relies on Howey, United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975) (Forman); Tcherepnin v. Knight, 389 U.S. 332 (1967) (Tcherepnin); SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943) (Joiner), SEC v. Int'l Loan Network, Inc., 968 F.2d 1304, 1307 (D.C. Cir. 1992), SEC v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S. Ct. 117, 38 L. Ed. 2d 53 (1973) (Turner), SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 n.15 (5th Cir. 1974) (Koscot) and Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce Fenner & Smith, 756 F.2d 230 (2d Cir. 1985) (Gary Plastic). 3 Section 21(a)(1) of the Exchange Act provides, in relevant part, that the Commission may "investigate any facts, conditions, practices, or matters which it may deem necessary or proper to aid in the enforcement of [the Exchange
based on settled actions against a number of issuers for offering and selling digital assets in violation of the Securities Act.4
(iii) SEC Public Statements. In November 2018, the Divisions of Corporation Finance, Investment Management and Trading and Markets released a joint statement emphasizing that activities related to digital assets may be subject to the federal securities laws.5 Previously, Chairman Jay Clayton issued a public statement on cryptocurrencies and initial coin offerings.6
(iv) SEC Speeches. In June 2018, Director of the Division of Corporation Finance William Hinman delivered a speech (Hinman Speech) expressing his views on when digital assets are offered and sold as securities and whether a digital asset that was originally offered in a securities offering can be later sold in a manner that does not constitute an offering of a security.7
In light of the various sources that set forth the basis for the Framework, the following provides a guide to navigate it. Blockchain companies distributing digital assets and secondary markets trading such assets should carefully evaluate these factors, including the underlying source of the guidance.8
The foundation of the Framework's analysis is the Supreme Court's Howey case and its progeny. Under Howey, an "investment contract" exists when there is the (i) investment of money (ii) in a common enterprise (iii) with a reasonable expectation of profits to be derived from the efforts of others.
Act], in the prescribing of rules and regulations under [the Exchange Act], or in securing information to serve as a basis for recommending further legislation concerning the matters to which [the Exchange Act] relates."
4 See In re Munchee Inc., Securities Act Release No. 10,445 (Dec. 11, 2017) (Munchee), In re Tomahawk Exploration LLC, Securities Act Rel. 10,530 (Aug. 14, 2018) (Tomahawk), In re CarrierEQ, Inc., d/b/a Airfox, Securities Act Release No. 10,575 (Nov. 16, 2018) (Airfox), In re Paragon Coin, Inc., Securities Act Release No. 10,574 (Nov. 16, 2018) (Paragon), In re Gladius Network LLC, Securities Act Release No. 10,608 (Feb. 20, 2019) (Gladius). While a respondent may appeal an adverse final order of the Commission in federal circuit court, courts apply a deferential standard to review of the Commission's findings.
5 The statement represents the views of the Divisions of Corporation Finance, Investment Management and Trading and Markets and is not a rule, regulation or statement of the SEC, meaning that the Commission neither approved nor disapproved its content.
6 Similarly, the Chairman's statement does not necessarily reflect the views of any other Commissioner or the Commission. As noted by the Chairman, "the statement is not, and should not be taken as, a definitive discussion of applicable law, all the relevant risks with respect to these products, or a statement of my position on any particular product." In September 2018, Chairman Clayton issued a public statement noting that staff statements are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties, that staff statements may be modified, rescinded or supplemented in light of market or other developments and that Enforcement and Office of Compliance Inspections and Examinations staff should keep the distinction between staff views and rules and regulations of the Commission in mind. Commissioner Hester Peirce recently delivered a speech on the same subject.
7 As with other staff statements, Director Hinman noted that the speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff and that the SEC disclaims responsibility for any private publication or statement of any SEC employee or Commissioner.
8 Like all Staff guidance, the Framework represents the views of the Staff and is not a rule, regulation or statement of the SEC, nor is it binding on the SEC and does not modify or replace any existing laws, regulations or rules
I. Investment of Money
The first prong of the Howey test requires an "investment of money."
1. The first prong of the Howey test is typically satisfied in an offer Framework, p. 2.
and sale of digital assets because the digital asset is purchased
or otherwise acquired in exchange for value, whether in the form
of real (or fiat) currency, another digital asset or other type of
2. Form of Consideration. The lack of monetary consideration does See Framework at fn 9. See
not mean that the investment of money prong is not satisfied.
also DAO Report, citing
Uselton v. Comm. Lovelace
Motor Freight, Inc., 940 F.2d
564, 574 (10th Cir. 1991).
3. Bounty Programs. Tokens issued under a so-called bounty
Framework at fn. 9;
program or otherwise provided to investors in exchange for services designed to advance the issuer's economic interests
and foster a trading market for its securities may satisfy the
investment of money.
4. Air Drops. Tokens distributed through a so-called air drop, or
Framework at fn. 9.
otherwise distributed to holders of another digital asset, typically
to promote its circulation, may satisfy the investment of money.
II. Common Enterprise
The second prong of the Howey test requires that the investment of money be in a "common enterprise."
1. Horizontal or Vertical Commonality. Federal circuit courts are
See Framework at fn 10. See
split on the appropriate test to establish a common enterprise and require either "horizontal" or "vertical" commonality. The
also Revak v. SEC Realty Corp., 18 F.3d. 81, 87-88 (2d
"horizontal" approach establishes a common enterprise where each individual investor's fortunes are tied to the fortunes of the
other investors by the pooling of assets, usually combined with the pro-rata distribution of profits. "Vertical commonality" looks to
the relationship between an investor and the promoter. 9
2. The SEC does not require either horizontal or vertical
Framework at pg. 2;
commonality per se, and Staff have typically found that a common enterprise exists when evaluating digital assets
Framework at fn. 10, 11, citing SEC v. Int'l Loan
because the fortunes of digital asset purchasers have been
Network, Inc., 968 F.2d 1304,
linked to each other or to the success of the promoter's efforts. 1307 (D.C. Cir. 1992).
3. The SEC does not view common enterprise as a distinct element Framework at fn. 10, citing In
of an investment contract.
re Barkate, 57 S.E.C. 488,
9 Courts have used two variants of the vertical commonality test in determining whether a common enterprise exists. For courts applying a strict vertical commonality standard, the fortunes of the promoter and investor must be linked. See Turner at 482 (finding a common enterprise despite the absence of pooling). The broad vertical approach requires only that the investor's realization of profits be tied to the promoter's skill or effectiveness. See Koscot at 478.
496 n.13 (Apr. 8, 2004) and the Commission's Supplemental Brief at 14 in SEC v. Edwards, 540 U.S.
389 (2004) (on remand to the
III. Reasonable Expectation of Profits Derived From Efforts of Others
The third prong of the Howey test is whether a purchaser has a reasonable expectation of profits (or other financial returns) derived from the efforts of others. The Framework notes that this is usually the main issue in analyzing a digital asset under Howey. When a promoter, sponsor or other third party (or affiliated group of third parties) (each an Active Participant or AP) provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, the Staff view this prong of the test to be met.
The Staff further asserts that the inquiry is an objective one, focused on the transaction itself and the manner in which the digital asset is offered and sold.10 The Framework considers whether there is a
reasonable expectation of profits and whether a purchaser is relying on the efforts of others as separate factors.11 According to the Framework, the following characteristics are especially relevant in an analysis of whether the third prong of the Howey test is satisfied.12
III.A. Expectation of Profits
According to the Framework, a purchaser may expect to realize a return through, among other things,
capital appreciation resulting from the development of the initial investment or business enterprise or a participation in earnings resulting from the use of purchasers' funds.13 Price appreciation resulting solely
from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered "profit" under the Howey test.14
The Framework notes that the more the following characteristics are present, the more likely it is that
there is a reasonable expectation of profits. However, the Framework does not assign a weight to each
1. Methods of Realizing Profits. The digital asset gives the holder rights to share in the enterprise's income or profits or to realize
The Framework at pg. 6.
gain from capital appreciation of the digital asset.
(a) The opportunity may result from appreciation in the value
of the digital asset that comes, at least in part, from the
operation, promotion, improvement or other positive
developments in the network, particularly if there is a
10 The Howey test is an "objective inquiry into the character of the instrument or transaction offered based on what the purchasers were `led to expect.' " Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir. 2009).
11 Other courts have considered the "expectation of profits" and "derived from the efforts of others" as a single element of the Howey test. See Warfield v. Alaniz, 569 F.3d 1015, 1020 (9th Cir. 2009) (citing SEC v. Rubera, 350 F.3d 1084 (9th Cir. 2003)) ("We distilled Howey's definition into a three-part test ....").
12 The Framework at pg. 2-3.
13 The Framework at 2-3 and pg. 6, citing United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975).
14 The Framework at pg. 6 (emphasis in original).
secondary trading market that enables digital asset holders to resell their digital assets and realize gains. (b) This also can be the case where the digital asset gives the holder rights to dividends or distributions. 2. Methods of Realizing Profits. The digital asset is transferable or traded on or through a secondary market or platform or is expected to be in the future. 3. Methods of Realizing Profits. Purchasers reasonably would expect that an Active Participant's efforts will result in capital appreciation of the digital asset and therefore be able to earn a return on their purchase. 4. Methods of Realizing Profits. There are limited or no restrictions on reselling those digital assets, particularly where an Active Participant is continuing in its efforts to increase the value of the digital assets or has facilitated a secondary market. 5. Tokens Offered Broadly. The digital asset is offered broadly to potential purchasers as compared to being targeted to expected users of the goods or services or those who have a need for the functionality of the network. 6. Price. There is little apparent correlation between the purchase/offering price of the digital asset and the market price of the particular goods or services that can be acquired in exchange for the digital asset. 7. Price. The digital asset is offered or sold to purchasers at a discount to the value of the goods or services. 8. Quantities. There is little apparent correlation between quantities the digital asset typically trades in (or the amounts that purchasers typically purchase) and the amount of the underlying goods or services a typical consumer would purchase for use or consumption. 9. Quantities. The digital asset is offered or sold to purchasers in quantities that exceed reasonable use. 10. Marketing. The digital asset is marketed, directly or indirectly, using any of the following: (a) the expertise of an Active Participant or its ability to build or grow the value of the network or digital asset; (b) terms that indicate the digital asset is an investment or that the solicited holders are investors; (c) that the intended use of the proceeds from the sale of the digital asset is to develop the network or digital asset; (d) the future (and not present) functionality of the network or digital asset, and the prospect that an Active Participant will deliver that functionality; (e) the promise (implied or explicit) to build a business or operation as opposed to delivering currently available goods or services for use on an existing network; (f) the ready transferability of the digital asset as a key selling feature; (g) the potential profitability of the operations of the network or the potential appreciation in the value of the digital asset; (h) the availability of a market for the trading of the digital asset, particularly where the Active Participant implicitly
The Framework at pg. 6. The Framework at pg. 6. The Framework at pg. 11. The Framework at pg. 6. The Framework at pg. 7. The Framework at pg. 11. The Framework at pg. 7.
The Framework at pg. 11. The Framework at pg. 7-8.
or explicitly promises to create or otherwise support a
trading market for the digital asset.
11. Use of Proceeds. An Active Participant has raised an amount of The Framework at pg. 7. See
funds in excess of what may be needed to establish a functional also Hinman Speech at pg. 4.
network or digital asset.
12. Use of Proceeds. The Active Participant continues to expend
The Framework at pg. 7.
funds from proceeds or operations to enhance the functionality or
value of the network or digital asset.
13. Active Participant May Profit. An Active Participant is able to
The Framework at pg. 7. See
benefit from its efforts as a result of holding the same class of
also Hinman Speech at pg. 2.
digital assets as those being distributed to the public. "Reasonable Expectations of Profits" Re-evaluation Considerations
When evaluating whether a digital asset previously sold as a security should be re-evaluated at the
time of latter offer or sale, the Staff provides the following additional considerations. As they relate to "reasonable expectation of profits," the presence of, including, but not limited to, one or more of these
factors makes it less likely that future sales of the digital asset are securities transactions.
14. Purchasers of the digital asset no longer reasonably expect that The Framework at pg. 8.
continued development efforts of an Active Participant will be a
key factor for determining the value of the digital asset.
15. The value of the digital asset has shown a direct and stable
The Framework at pg. 8.
correlation to the value of the good or service for which it may be
exchanged or redeemed.
16. The trading volume for the digital asset corresponds to the level The Framework at pg. 8.
of demand for the good or service for which it may be exchanged
17. Whether holders are then able to use the digital asset for its
The Framework at pg. 8.
intended functionality, such as to acquire goods and services on
or through the network or platform.
18. Whether any economic benefit that may be derived from
The Framework at pg. 8.
appreciation in the value of the digital asset is incidental to
obtaining the right to use it for its intended functionality.
19. No Active Participant has access to material, nonpublic
The Framework at pg. 8. See
information or could otherwise be deemed to hold material inside also Hinman Speech at pg. 3.
information about the digital asset.
III.B. Reliance on the Efforts of Others
The U.S. Supreme Court in Howey determined there was an investment contract where investors were "led to expect profits solely from the efforts of a promoter or third party."15 Subsequent decisions have relaxed the view that the expectation of profits be derived "solely" from the efforts of others.16 The Staff recognizes that "holders of digital assets may put forth some effort in the operations of the network, but
those efforts do not negate the fact that the holders of digital assets are relying on the efforts of the Active Participant. That a scheme assigns `nominal or limited responsibilities to the [investor] does not negate the existence of an investment contract.' "17 Managerial and entrepreneurial efforts typically are
15 Howey at 299.
16 See Turner at 775. "In applying the Supreme Court's definition of an investment contract, therefore, the efforts of others which are relevant for purposes of the definition are those essential managerial efforts which affect the failure or success of the enterprise." See also Forman at 852. "The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others."
17 The Framework at fn. 16, quoting SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 n.15 (5th Cir. 1974).
characterized as involving expertise and decision-making that impacts the success of the business or enterprise through the application of skill and judgment.18
The more the following characteristics are present, the more likely it is that there is reliance on the
efforts of others. 1. AP's Role. An Active Participant is responsible for the
The Framework at pg. 3;
development, improvement (or enhancement), operation or
Hinman Speech at 4. Also
promotion of the network, particularly if purchasers of the digital see Turner; also see Koscot
asset expect an Active Participant to be performing or overseeing at 483 n.15.
tasks that are necessary for the network or digital asset to
achieve or retain its intended purpose or functionality. 2. AP's Role. Where the network or the digital asset is still in
The Framework at pg. 3-4;
development and the network or digital asset is not fully
also see Gary Plastic.
functional at the time of the offer or sale, purchasers would
reasonably expect an Active Participant to further develop the
functionality of the network or digital asset (directly or indirectly).
This particularly would be the case where an Active Participant
promises further developmental efforts in order for the digital
asset to attain or grow in value. 3. AP's Role. An Active Participant's efforts are "undeniably
The Framework at fn. 16,
significant ones, or essential managerial efforts which affect the failure or success of the enterprise," as opposed to efforts that
quoting Turner at 482 and citing the DAO Report.
are more ministerial in nature. 4. AP's Role. An Active Participant promises further developmental The Framework at pg. 4; also
efforts in order for the digital asset to attain or grow in value.
see Gary Plastic.
5. AP's Role. There are essential tasks or responsibilities performed The Framework at pg. 4.
and expected to be performed by an Active Participant, rather
than an unaffiliated, dispersed community of network users (commonly known as a "decentralized" network).
6. AP's Role. An Active Participant has a lead or central role in the
The Framework at pg. 4.
direction of the ongoing development of the network or the digital
asset, in particular, if an Active Participant plays a lead or central
role in deciding governance issues, code updates or how third
parties participate in the validation of transactions that occur with
respect to the digital asset. 7. AP's Role. An Active Participant has a continuing managerial role The Framework at pg. 4-5.
in making decisions about or exercising judgment concerning the Hinman Speech at 4.
network or the characteristics or rights the digital asset
represents, including, for example,
(a) determining whether and how to compensate persons
providing services to the network or to the entity or
entities charged with oversight of the network;
(b) determining whether and where the digital asset will
trade. For example, purchasers may reasonably rely on
an AP for liquidity, such as where the AP has arranged,
or promised to arrange for, the trading of the digital
asset on a secondary market or platform;
(c) determining who will receive additional digital assets and
under what conditions;
18 The Framework at fn. 16.
(d) making or contributing to managerial-level business
decisions, such as how to deploy funds raised from
sales of the digital asset;
(e) playing a leading role in the validation or confirmation of
transactions on the network or in some other way having
responsibility for the ongoing security of the network;
(f) making other managerial judgments or decisions that will
directly or indirectly impact the success of the network or
the value of the digital asset generally. 8. AP's Role. Purchasers would reasonably expect the Active
The Framework at pg. 5.
Participant to undertake efforts to promote its own interests and Hinman Speech at 4.
enhance the value of the network or digital asset, such as where:
(a) AP may profit. An Active Participant has the ability to
realize capital appreciation from the value of the digital
asset. In these instances, purchasers would reasonably
expect the AP to undertake efforts to promote its own
interests and enhance the value of the network or digital
(b) Digital assets are AP's compensation. An Active
Participant distributes the digital asset as compensation to management or the AP's compensation is tied to the
price of the digital asset in the secondary market. To the
extent these facts are present, the compensated
individuals can be expected to take steps to build the
value of the digital asset.
(c) AP retains intellectual property rights. An Active
Participant owns or controls ownership of intellectual
property rights of the network or digital asset, directly or
(d) AP monetizes value. An Active Participant monetizes the
value of the digital asset, especially where the digital
asset has limited functionality.
9. AP Supports the Market. An Active Participant creates or
The Framework at pg. 4,
supports a market for, or the price of, the digital asset.
citing Gary Plastic.
This can include, for example, an Active Participant that
(a) controls the creation and issuance of the digital asset or
(b) takes other actions to support a market price of the digital
asset, such as by limiting supply or ensuring scarcity, through buybacks, "burning" or other activities.
"Efforts of Others" Re-evaluation Considerations
In evaluating whether a digital asset previously sold as a security should be re-evaluated at
the time of later offers or sales, there would be additional considerations as they relate to the "efforts of others," including but not limited to the following:
10. AP No Longer Important to Value. The efforts of an Active
The Framework at pg. 5.
Participant, including any successor promoter, are no longer
important to the value of an investment in the digital asset. 11. AP's Essential Efforts No Longer Expected. The network on
The Framework at pg. 5
which the digital asset is to function operates in such a manner
that purchasers would no longer reasonably expect an Active
Participant to carry out essential managerial or entrepreneurial
12. AP No Longer Affects Success. The efforts of an Active Participant are no longer affecting the enterprise's success.
The Framework at pg. 5.
III.C. Characteristics of Use or Consumption
The U.S. Supreme Court in Howey stated that the analysis of whether an arrangement is an investment contract focuses on the "economic reality of the transaction." In Forman, the Supreme Court stated that where a purchaser is not "attracted solely by the prospects of a return on his investment ... [but] is motivated by a desire to use or consume the item purchased ... the securities laws do not apply."
The Framework provides several characteristics of digital assets that may indicate that the token is
offered and sold for use or consumption by purchasers. While the Staff notes that no one of the
following characteristics is necessarily determinative, the stronger their presence, the less likely the
Howey test is met.
1. Fully Operational. The distributed ledger network and digital
The Framework at pg. 9.
asset are fully developed and operational.
2. Immediate Use. Holders of the digital asset are immediately able The Framework at pg. 9.
to use it for its intended functionality on the network, particularly Hinman at 5.
where there are built-in incentives to encourage such use. 3. Design. The digital assets' creation and structure is designed and The Framework at pg. 9.
implemented to meet the needs of its users rather than to feed
speculation as to its value or development of its network. For
example, the digital asset can be used only on the network and
generally can be held or transferred only in amounts that correspond to a purchaser's expected use.
4. Limited Possibility of Appreciation. Prospects for appreciation in The Framework at pg. 9.
the value of the digital asset are limited. For example, the design Hinman at 4.
of the digital asset provides that its value will remain constant or
even degrade over time, and therefore a reasonable purchaser
would not be expected to hold the digital asset for extended
periods as an investment.
5. Use for Payments. With respect to a digital asset referred to as a The Framework at pg. 9.
virtual currency, it can immediately be used to make payments in
a wide variety of contexts or acts as a substitute for real (or fiat)
(a) This means that it is possible to pay for goods or services
with the digital asset without first having to convert it to
another digital asset or real currency.
(b) If it is characterized as a virtual currency, the digital asset
actually operates as a store of value that can be saved,
retrieved and exchanged for something of value at a later
6. Redemption for Goods or Services. With respect to a digital asset The Framework at pg. 10.
that represents rights to a good or service, it currently can be
Hinman at 5.
redeemed within a developed network or platform to acquire or
otherwise use those goods or services. Relevant factors may
(a) There is a correlation between the purchase price of the
digital asset and a market price of the particular good or
service for which it may be redeemed or exchanged.
(b) The digital asset is available in increments that correlate
with a consumptive intent versus an investment or
(c) An intent to consume the digital asset may also be more
evident if the good or service underlying the digital asset
can only be acquired, or more efficiently acquired, through the use of the digital asset on the network. 7. Incidental Economic Benefit. Any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended functionality. 8. Marketing. The digital asset is marketed in a manner that emphasizes the functionality of the digital asset, and not the potential for the increase in market value of the digital asset. 9. Functional Network and Digital Asset. Potential purchasers have the ability to use the network and use (or have used) the digital asset for its intended functionality. 10. Restrictions on Transfer. Restrictions on the transferability of the digital asset are consistent with the asset's use and not facilitating a speculative market. 11. Secondary Market. If an Active Participant facilitates the creation of a secondary market, transfers of the digital asset may only be made by and among users of the platform.
The Framework at pg. 10.
The Framework at pg. 10. The Framework at pg. 10. The Framework at pg. 10. The Framework at pg. 10.
The Division of Corporation Finance's April 3 No-Action Letter indicated that it would not recommend enforcement action against TurnKey Jet, Inc. (TKJ) if TKJ offered and sold its tokens without registration under the Securities Act and the Exchange Act so long as TKJ followed the facts described in its request letter (Request Letter). In reaching this position, the Staff noted certain conditions that the relief is based on, which draw on several characteristics and factors listed in the Framework above. Particularly, the following sets forth each condition in the No-Action Letter, along with a reference to the applicable section in the Framework Chart above:
1. The platform and tokens will be fully developed and operational See III.B. Reliance on the
at the time tokens are sold, and no proceeds from token sales
Efforts of Others, Factor 2;
will be used to develop the TKJ platform.
also see III.C. Characteristics
of Use or Consumption,
Factors 1 and 9.
2. The tokens will be immediately usable for their intended
See III.C. Characteristics of
functionality at the time they are sold.
Use or Consumption, Factors
1 and 2; also see III.B.
Reliance on the Efforts of
Others, Factors 1 and 2.
3. TKJ will restrict transfers of tokens to TKJ wallets only, and not to See III.C. Characteristics of
wallets external to the platform.
Use or Consumption, Factors
4, 10, and 11.
4. TKJ will sell tokens at a price of one U.S. dollar per token
See III.C. Characteristics of
throughout the life of the program, and each token will represent Use or Consumption, Factors
a TKJ obligation to supply air charter services at a value of one 4, 5, 6, and 11; also see III.A.
U.S. dollar per token.
Expectation of Profits,
Factors 6, 7 and 8.
5. If TKJ offers to repurchase tokens, it will only do so at a discount See III.A. Expectation of
to the face value of the tokens that the holder seeks to resell to Profits, Factors 6, 7 and 8;
also see III.B. Reliance on
TKJ, unless a court within the United States orders TKJ to liquidate the tokens. 6. TKJ will market the tokens in a manner that emphasizes the functionality of the token and not the potential for the increase in the market value of the token.
the Efforts of Others, Factors 6, 7 and 9. See III.C. Characteristics of Use or Consumption, Factors 6 and 8; also see III.A. Expectation of Profits, Factor 10.
The Framework provides insight into how the Staff will interpret facts and circumstances specific to digital assets when applying the Howey test to determine whether the offer and sale of a digital asset is an investment contract and therefore a security. While no one factor addressed in the Framework is necessarily dispositive as to whether or not an investment contract exists, the No-Action Letter (while only applicable to a narrow fact pattern) appears to highlight those factors in the Framework that the Staff views as particularly determinative. The Framework affirms that each particular offer and sale of a digital asset may have unique facts and circumstances that merit a separate analysis of the Howey test at various stages of product development. Blockchain companies and/or secondary trading venues are advised to carefully consider, in consultation with counsel, the body of case law that informs the Framework, including Howey and its progeny, to determine whether a digital asset in an "investment contract" within the definition of a security.
Lilya Tessler, Partner Thomas J. Kim, Partner Verity A. Van Tassel Richards, Associate Daniel Engoren, Associate K. Braeden Anderson, Associate
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