The DAO July 25, , available at https: Is token creation commensurate with meeting the needs of users or, rather, with feeding speculation? Are there built-in incentives that compel using the tokens promptly on the network, such as having the tokens degrade in value over time, or can the tokens be held for extended periods for investment? Who Are the Parties Involved? Are the assets dispersed across a diverse user base or concentrated in the hands of a few that can exert influence over the application?
Finally, it is important to note that, although Director Hinman offered clarity on long-standing questions, there remain other pivotal issues that his speech did not address. First, using Bitcoin and Ether as its primary examples, Director Hinman clarified that tokens that are initially classified as securities can later be viewed as non-securities under certain circumstances. Are independent actors setting the price or is the promoter supporting the secondary market for the asset or otherwise influencing trading? Is token creation commensurate with meeting the needs of users or, rather, with feeding speculation? Sixth, and likely welcomed by many token sellers and their legal counsel, 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. Gault-Brown , Daniel R. Is there a person or group that has sponsored or promoted the creation and sale of the digital asset, the efforts of whom play a significant role in the development and maintenance of the asset and its potential increase in value? Second, what is the nature of the digital asset? Dario de Martino , Susan I. Would purchasers reasonably believe such efforts will be undertaken and may result in a return on their investment in the digital asset? This clarification was welcomed by some in the token sale space who had been concerned that initial token sales launched for capital raising purposes might result in future sales including secondary market sales of such tokens that would continue to be treated as sales of securities and, hence, be subject to continued regulation under U. The DAO July 25, , available at https: Are the tokens available in increments that correlate with a consumptive versus investment intent? Fourth, consistent with prior guidance, sales of tokens for capital raising purposes will likely continue to be deemed securities offerings. Klein , Alfredo B. Second, it is not clear how an issuer whose token was initially offered as a security might, as a practical matter, exit such a framework, including whether purchasers who initially acquired digital tokens under the auspices of a securities offering may continue to demand the protections thereof even if at some point, sales of the token cease to constitute sales of securities. If ETH were deemed to be a security issued, sold, or traded in violation of securities laws, many feared that this would threaten the viability and legality of all Ethereum-based projects. Has the promoter raised an amount of funds in excess of what may be needed to establish a functional network and, if so, has it indicated how those funds may be used to support the value of the tokens or to increase the value of the enterprise? Are there built-in incentives that compel using the tokens promptly on the network, such as having the tokens degrade in value over time, or can the tokens be held for extended periods for investment? What Is the Nature of the Digital Asset? Silva , and Mark S. The so-called Howey test, developed by the U. Fifth, 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. Factual Examination In his speech, Director Hinman emphasized two key areas for practitioners to examine when evaluating the treatment of a particular token as a security or non-security under U. Is the application fully functioning or in early stages of development? Are the assets dispersed across a diverse user base or concentrated in the hands of a few that can exert influence over the application? Is the asset marketed and distributed to potential users or the general public?
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