SEC Experts – Framework for Investment Contract Analysis of Digital Assets

Amid a flurry of calls for more clarity within the cryptospace, two leading SEC crypto experts released a document this week called the Framework for Investment Contract Analysis of Digital Assets. The document isn't an official SEC regulation.  Rather, the guide helps investors and companies determine the classification of a particular token.

Token Classification

A token's classification determines what regulations, including taxation, it falls under. Token classification concerns have risen sharply since the SEC began targeting ICOs at the start of 2018. Over the last two years, multiple companies allegedly sold unlicensed securities according to the SEC. These companies now face fines and possible jail time. Also, the SEC requires that these firms return all raised funds to investors.

SEC Intervention

One such example of the SEC’s recent interventions is the Paragon Coin sagaParagon Coin saga. In this case, Paragon allegedly sold securities without a license. Additionally, the promoters of the now defunct project, which include the famous rap artist The Game and a former Miss Iowa, Jessica VerSteeg, now face SEC charges for their participation.

In at least one instance, a company was spared the wrath of the SEC for self-registering their ICO before the SEC stepped in.  Gladius Network Llc avoided hefty fines and potential jail time by “taking steps to rectify the situation” according to SEC officials. In the end, investors received refunds and no charges were filed. Now, the SEC hopes that the Framework for Investment Contract Analysis of Digital Assets can alleviate any future confusion.

Gladius Network Avoids SEC Fines

The Howie Test

The SEC released statements in the past regarding token classification. In most instances, the Howie Test is the SEC's main recommendation. While this information helped investors, many requested a more concrete explanation of the evaluation process. In other words, investors seek a classification model that includes blockchain terminology.

More Clarity

Recognizing the need for more clarity, two SEC agents released the Framework for Investment Contract Analysis of Digital Assets. These agents consisted of the Director of the SEC's Division of Corporation Finance, Bill Hinman and Senior Advisor for Digital Assets and Innovation, Valerie Szczepanik.

Both of these individuals are very familiar with the crypto space, with the latter dubbed – the Crypto Czar by her co-workers. These individuals took note that applying the 71-year old Howie Test to the new digital economy is difficult. This reasoning led these two crypto specialists to provide this in-depth framework.

Important Factors

Speaking on the document, Hinman explained how much of the Framework for Investment Contract Analysis of Digital Assets’ criteria focus on the instruments used to issue and utilize the tokens in question. He described how a tokens distribution plan, offer terms, and economic inducements are critical when determining if a token falls under security regulations.

Hinman also took a moment to describe how an interested party could find additional information at FinHUb. FinHub is also known as the Strategic Hub for Innovation and Financial Technology. Here investors can find information to verify if an ICO is actually a security token offering (STOs).

No More Sidelines

These latest maneuvers showcase the SECs determination to get more involved in the cryptospace. With the advent of security tokens, more businesses are open to the idea of hosting a blockchain-based crowdfunding campaign. The financial benefits are obvious and now that regulations are in place, you can expect to see the STO market expand significantly.