The U.S. Securities and Exchange Commission (SEC) has published a framework for analyzing whether digital assets are “investment contracts” securities. The framework is said to present the views of its authors and is not officially recognized by the commission. However, it is meant to provide guidance on this topic.

The U.S. Supreme Court's landmark decisions in Howey from the 1940s held that an "investment contract" exists when money is invested in a common enterprise with reasonable expectation of profits to be derived from the efforts of others. The framework explains that the "Howey test" applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities. The framework identifies a non-exhaustive list of factors that are helpful, but not necessarily sufficient, to determine whether a digital asset is considered an "investment contract". The greater number of characteristics met, the greater the likelihood that the assets are indeed an “investment contract”.

The framework also identifies some of the factors to be considered in determining whether and when a digital asset is less likely to be considered a security. For instance, the distributed ledger network and digital asset are fully developed and operational; the digital assets' creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network; and the digital asset is marketed in a manner that emphasizes the functionality of the digital asset, and not the potential increase in the market value of the digital asset.

This article was published in the Internet, Cyber and Copyright Group’s April 2019 Newsletter.