16:11 08.11.2019
Svetlana Tereshenok (Neironix)

How To Understand Whether Digital Assets Are Securities Or Not? SEC Guidance

The digital currencies market is too young, so the legislative field is not yet formed, to put it mildly. More specifically, the cryptocurrency industry is still too far from structured regulation at the international level.

Nevertheless, financial regulators are already developing the first legislative acts that will help make this market more stable and secure. In April 2019, the U.S. Securities and Exchange Commission (SEC) published a detailed guide for market participants to determine whether the sale or placement of a digital asset is a securities transaction or not. So, first things first.

SEC Knowledge Base

Specialists of the strategic center for innovation and financial technology (FinHub), working under the SEC authority, have published a large analytical knowledge base. These data help to understand whether a particular token falls to the “securities” category or not. This will help to understand whether an asset is subject to regulation in accordance with federal securities laws or not.

Together with this guide specialists in the corporate finance division published an interesting letter on the same day. It describes digital assets that are not subject to registration and seizure in accordance with the Securities Act of 1933 and the Exchange Act of 1934.

This letter in tandem with the framework shows that the regulatory frame in the field of blockchain technologies and the digital economy in the USA is starting to change. This means that the employees of the main regulatory body of the United States are ready to refuse to register some types of digital assets as securities.

Sure, this can be called a “thaw” for the industry, but by and large, this only applies to a limited number of blockchain projects. We decided to reveal this topic to our readers.

What is a framework program?

To begin with, we recall that in November 2018, the head of the corporate finance division, William Hinman announced that his department was going to issue a clear and simple manual. The new development of the FinHub division is a useful analytical tool that helps evaluate the applicability of federal legislation in the field of securities to the sale or placement of a specific digital asset.

In this program, employees explain their own views on how the analysis of an investment contract should affect operations with digital assets. This analysis was first formulated in the SEC case against W.J. Howey Co in 1964, adjudicated by the US Supreme Court. At that time, a peculiar formula (Howey) for interpretation of an investment contract was developed. Any action can be recognized as a transaction with securities if only to follow three criteria:

  • Investment money.

  • Funds should be invested in a common enterprise.

  • After that, investors should have reasonable expectations of profit.

To ensure that a regulator confirms the fact of concluding an investment contract, and therefore, the operation with securities, it is necessary to complete all three of the above Howey formula points. As a rule, the placement of digital assets falls under only the first two points, while the third is one of the main in making the decision.

Money investment

It is important to understand that the principles that the framework program reflects are quite clearly established in case law. It says that the Howey test considers not only funds that are provided by the state, that is, national currencies. All other forms of monetary expression, including cryptocurrencies (BTC, ETH, XRP, etc.), non-monetary reward (advertising services for the issuer, various “bounty programs”, etc.) also fall under this definition.

Common enterprise

Regarding the second paragraph of the Howey test, the framework says that (1) investments in digital assets generally involve a common enterprise and (2) the Securities and Exchange Commission does not consider a common enterprise as a separate element of an investment contract.

Reasonable expectation of profit

To understand whether this or that action falls under this paragraph, it is necessary to compare factors:

  • A digital asset gives its owner the right to a part of the company's revenues or to profit from the increase in the total capitalization of the enterprise.

  • A digital asset can be sold or transferred to the secondary market, or such an opportunity will become available in the future.

  • A digital asset must be marketed, directly or indirectly. This should imply the fact that this placement is an investment opportunity.

The framework implies that if investors are additionally motivated to use a digital asset (as payment for services or goods), then this reduces the likelihood of its compliance with this paragraph.

Also, the analysis framework determines additional nuances that must be considered when determining whether a digital asset is placed and sold for consumption or use by customers:

  • Holders can use the digital asset for its intended purpose (sell, transfer, pay them anything) at any time.

  • The development and implementation of digital assets should meet the users’ needs and requirements.

  • Growth prospects for digital assets should be limited.

Others' efforts

As you know, one of the key features of digital assets is their decentralization. So it`s hard to understand whether benefits will be derived from other parties and, how broadly the very concept of “others” is. In this regard, the framework includes  the following points:

When a promoter, sponsor, 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 profits from those efforts, then the third prong of the Howey test is satisfied.

Besides, this analytical tool provides a number of factors to determine the presence of the element “efforts of other parties”. Let's take a closer look at them:

  • Active network members must fulfill a number of important management tasks and responsibilities. This should not fall on a non-affiliated, fragmented community.

  • Active participants must maintain the liquidity of the digital asset.

  • Active participants play a key role in the development of a blockchain network or digital asset.

So, although none of the characteristics is decisive, still, the greater their presence, the more likely it is that the final buyer will rely on the efforts of others.


It is important to understand that representatives of the SEC corporate finance division paid attention to the fact that this program is not a constant. This means that its rules may change, given the methods of using, placing and selling a particular digital asset over time. Besides, the framework includes paragraphs providing for the revision of the status of a digital asset. For example, it was previously placed as a security, since it corresponded to all three points of the Howey test, but for several reasons, this status may change in the future.

TurnKey Jet, Inc. ("TKJ") No-Action Letter

This letter clearly describes how to place and sell a digital asset without the need for its registration in accordance with the Law on “Securities of 1933”.

So, TurnKey Jet is a charter airline, its specialists have developed a special platform for their customers where they can buy the TKJ token. Consequently, you can buy tickets for the company's charter flights using this digital asset.

  • The rate of the TKJ token is unchanged and is always equal to 1 US dollar.

  • Emission — no limits.

  • The transfer of rights to tokens is carried out exclusively within the company's platform.

  • Only company services can be purchased for TKJ tokens.

TKJ experts believe that the introduction of a digital asset will contribute to faster payment processing, and therefore, improve the quality of services.

Before the no-action decision, FinHub experts pay close attention to several factors. These features distinguish the placement of the TKJ token from those digital assets that are placed as investment contracts.

FinHub requirements for a digital asset that does not need to be registered as security:

  • The funds raised as a result of the sale of the token will not be used to develop its own platform.

  • TKJ digital assets will immediately be used only for their intended purpose (to pay for the services of the company).

  • TKJ must limit the ability to transfer digital assets to its own platform.

  • TKJ tokens will be sold exclusively at a fixed price — $1 per coin.

The TKJ company can buy back its own tokens only at a discounted price and only in the absence of a court order on the liquidation of the company's digital assets. The TKJ company should promote its own tokens in the market, focusing on functionality, and not on the increase in their rate.

This position of FinHub specialists is not mandatory for implementation by the main financial regulator of the USA. Nevertheless, it helps to understand the nuances of the placement and sale of digital assets, which are not subject to mandatory registration in accordance with the law on securities.

Regulatory impact

By and large, the TKJ framework and no-action letter are not very different from previous SEC guidelines. But these analytical tools have additional information about the factors that are taken into account during the analysis.

The framework answers the market participants` questions regarding the feasibility of carrying out certain operations with digital assets. It is important to understand that the above guidelines may be changed or interpreted differently over time. For this reason, third parties and issuers involved in the placement of digital assets have to closely monitor the development of the legal framework and carefully analyze specific factors. This will help to avoid future litigation and time and money wasted.

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Wow. Very informative and on business. I personally think that reasonable expectation of profit is vital. Other points are rather important too, though.
Useful information for a complete understanding and distinction of tokens, as sometimes it’s really sometimes unclear what category the token belongs to in a project, utility or security.
This is a very detailed and good explanation of what is happening. In any case, fortunately, I reviewed both the Framework for 'Investment Contract' Analysis of Digital Assets and FinHub incoming letter. I would say that they look serious and solid, it's time to look at what this information and changes will be in practice.
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