The Journey from Security to Non-Security: SEC Director Comments on Mutability of Token Treatment

Many in the blockchain and cryptocurrency community were in a celebratory mood on June 14, 2018, following a landmark speech given by William Hinman, Director for the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “SEC”). Director Hinman’s remarks addressed, head on, a key question that has long been vexing market participants and their lawyers—namely, whether present-day sales of Ether, the native token of the Ethereum blockchain, are sales of investment contracts and, hence, securities. Perhaps even more significant, however, was the analysis behind Director Hinman’s views on Ether—that the characteristics that cause a token to be classified as a security can change so that the same token, or one issued at a later time, may be reclassified as a non-security.

Director Hinman’s speech is significant in many ways. Key takeaways include:

1.      Using Bitcoin and Ether as primary examples, Director Hinman clarified that tokens that are initially classified as securities can later be viewed as non-securities under certain circumstances.

2.      The speech emphasized the importance of decentralization as a factor that is relevant not just to the U.S. federal securities law analysis, but also to the degree and necessity of ongoing disclosure requirements.

3.      As the SEC staff has stated before, an issuer cannot simply label a token as a “utility token” in an attempt to avoid the applicability of U.S. federal securities laws.

4.      Consistent with prior guidance, sales of tokens for capital raising purposes will likely continue to be deemed securities offerings.

5.      There is certainly no one-size-fits-all structure or bright-line test for determining when a token is, is not, or ceases to be a security. 

6.      Director Hinman signaled that the SEC staff intends to provide assistance and guidance to token sellers on the proper characterization of the sale of digital assets.

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