SEC Chairman Clayton Addresses Application of Federal Securities Laws to Digital Assets
3/20/2019Earlier this month, Securities and Exchange Commission (SEC) Chairman Jay Clayton responded to a letter from Congressman Ted Budd (NC) regarding the application of federal securities laws to digital assets. Chairman Clayton reiterated the SEC’s “facts and circumstances” position as to whether a digital asset transaction involves the offer and sale of a security and highlighted the agency’s balanced regulatory approach, which “fosters responsible innovation in this area, while also protecting investors and markets.”
In order to determine whether a digital asset is a security, Chairman Clayton said the agency generally examines whether a digital asset fits the definition of “security” under federal securities laws and applies tests established through years of case law, including the “investment contact” test established in SEC v. W.J. Howey Co. He also highlighted the DAO Report, SEC Director of Corporation Finance William Hinman’s June 2018 speech and a joint statement from several of the SEC’s divisions as resources that market participants should review when evaluating whether a digital asset is a security.
He further said that he agrees with Director Hinman’s analysis that although a digital asset as initially offered or sold may be a security, this analysis is subject to change, and over time the digital asset may be offered or sold in such a way that it no longer, for example, represents an investment contract under the Howey framework.
Chairman Clayton added that although he believes the SEC has been transparent about the criteria it will use to make such determinations, he acknowledges market participants’ requests for “further dialogue on the subject.” He said that SEC staff is currently drafting additional guidance that will further assist market participants in determining whether a digital asset is offered or sold as a security. He also urged market participants to engage with the SEC’s FinHub portal and continue to educate themselves on the risks of digital asset investments.
Although Chairman Clayton’s letter does not provide new insights into his or the SEC’s views on digital asset regulation, it is a helpful outline of the agency’s digital asset regulatory framework. Additionally, it reminds us that the SEC’s previously announced guidance is still coming. We will continue to monitor when such guidance may be provided.