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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F. Dario de Martino
Dario de Martino is an associate in the Corporate Department of Morrison & Foerster’s New York office, and serves as the Co-Chair of MoFo’s Blockchain + Smart Contracts Group.
Mr. de Martino’s practice focuses on domestic and cross-border corporate transactions, principally in connection with public and private mergers and acquisitions, joint ventures, private equity transactions, and corporate governance matters. He represents a broad array of More ›
Susan I. Gault-Brown
Susan Gault-Brown is a partner in the Financial Services Group of Morrison & Foerster’s Washington, D.C. office. She serves as chair of the firm's Investment Management Group and co-chair of the firm's Blockchain + Smart Contracts Group. Ms. Gault-Brown advises participants in the investment management, FinTech, and financial services industries—including investment advisers, exempt reporting advisers, broker-dealers, funding portals, private funds, commodity trading advisors, commodity More ›
Daniel R. Kahan
Daniel Kahan is an associate in Morrison & Foerster’s Corporate Department. His corporate transactional practice focuses on venture capital and private equity investments, mergers and acquisitions, divestitures and spin-offs, public securities offerings, and corporate governance matters. Mr. Kahan also regularly advises clients in strategic technology transactions, including professional service agreements, software-as-a-service agreements, sourcing agreements, transition service agreements, distribution agreements, reseller agreements, and intellectual property More ›
Spencer D. Klein
Spencer Klein is a partner in the Corporate Department and serves as co-chair of the firm's global Mergers & Acquisitions Group and head of the Corporate Department in New York. Mr. Klein focuses his practice on M+A transactions and related matters such as proxy contests and takeover defense counseling. He has advised on more than 150 successfully closed mergers, tender and exchange offers, stock More ›
Alfredo B. D. Silva
Alfredo B. D. Silva represents public and private technology companies and strategic and financial investors in a broad range of capital markets transactions, early- and late-stage financings, and corporate governance matters in a variety of industries, including Life Sciences, Health Tech, FinTech, and SaaS. More ›
Mark S. Wojciechowski
Mark Wojciechowski is a partner at Morrison & Foerster LLP, serving as chair of the firm’s Finance and Projects Group. Mr. Wojciechowski focuses on leveraged and acquisition finance, middle market and asset based finance, mergers and acquisitions and hybrid transactions involving structured debt and equity investments. His clients include major foreign and domestic commercial banks and investment banks, as well as private credit debt More ›