First of all, for those not familiar with SEC (Security and Exchange Commission), SEC is an independent agency of the United States federal government, whose primary purpose is to enforce the law against market manipulation.
SEC has been after crypto for a while now. Back in May 2022, SEC doubled the size of its Crypto Assets and Cyber Unit by allocating 20 additional positions. This came during the time when so many scams (also new issuances) happened and a clearer guideline was needed on what it was considered a security and what not. Some of the responsibilities of this task unit include:
- Crypto asset offerings;
- Crypto asset exchanges;
- Crypto asset lending and staking products;
- Decentralized finance (“DeFi”) platforms;
- Non-fungible tokens (“NFTs”); and
- Stablecoins.
Today’s focus will be on the first one, crypto asset offerings.
Last week, SEC announced plans that they will be adding an Office of Crypto Assets to the Division of Corporation Finance’s Disclosure Review Program (DRP), which will specifically be reviewing company filing by issuers.
As per Renee Jones (Director of the Division of Corporation Finance with SEC), the creation of this office will help DRP to enhance its focus in the areas of crypto assets, seeing the recent growth in the crypto assets.
In plain English, if there is a new crypto/token launching, they will be required to do filings with SEC (this is applicable only for projects that operate in US markets), and this special Office of Crypto Assets will go over the filing and clearly define the status of the project. There is a lot of misconception about most of the crypto projects on whether they are securities or not.
The Securities Act of 1933 was about companies raising money from the public. Investors could decide which risks to take; companies that issued securities to the public were required to provide full, fair, and truthful disclosures to the public.
Gary Gensler (SEC Chairman), stated that:
“The core principles from these statutes apply to all corners of the securities markets. That includes securities and intermediaries in the crypto market. Nothing about the crypto markets is incompatible with the securities laws. Investor protection is just as relevant, regardless of underlying technologies.”
Then he goes:
“Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities. Offers and sales of these thousands of crypto security tokens are covered under the securities laws. Some tokens may not meet the definition of a security — what I’ll call crypto non-security tokens. These likely represent only a small number of tokens, even though they may represent a significant portion of the crypto market’s aggregate value.”
For this, in order to define whether a new issuance is considered a security or not, SEC applies a test called Howey Test. This test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an “investment contract,” and therefore would be considered a security and subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Under the Howey Test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
So, what’s the take on all this?
SEC, the regulator is treating this more seriously than ever. Based on the Howey Test, almost all crypto tokens will be considered Securities, this includes Ethereum blockchain and other well known blockchains. However, this excludes Bitcoin.
When this happens, new issuers will be required to do a lot more filing where they will be providing a lot more details on their project, public will be well informed on what they are getting involved, something which has been lacking in most of the ICOs. Web3 supporters would be against the idea of SEC interfering in something that is supposed to be fully decentralized but at the same time, lot of those web3 projects have been cash grab opportunities for a bunch of VC and founders.
SEC intervening does not mean a bad thing necessarily. It means that we will get to know more about a crypto/token project before their initial issuance and do our due diligence before getting involved.
🗞️ Other news in the space
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13 Reasons Why People Lose Money in Crypto Trading
Coinbase Is Funding A Lawsuit Against US Treasury Department
