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Client Alert: When Does A “Digital Asset” Qualify As A Security? A Deeper Dive Into Recent SEC Guidance

27 Jun 2019

Which of the following qualify as a “security” under U.S. Securities laws: coins, tokens, stamps, tickets, vouchers and chips? Trick question, they all do! Well, they all could potentially qualify as securities. The answer lies in evaluating the details of how the respective asset is created, marketed and sold to purchasers. Recently the SEC has released some substantive guidance on how to actually analyze those details which deserves a deeper analysis.

On April 3, the SEC took a big step forward in clarifying its position regarding digital assets by putting forward two separate releases. The first of these releases was a No-Action Letter (the “NAL”) pertaining to the issuance of tokens by TurnKey Jet, Inc. (“TKJ”). The second release was the announcement of “Framework for ‘Investment Contract’ Analysis of Digital Assets“ (the “Framework”) to help determine whether a digital asset is a security and therefore subject to U.S. federal securities laws. Combined, these two releases define some much needed guiderails in analyzing whether a particular digital asset qualifies as a security. However, some industry professionals (including myself) believe that certain of the included substantive factors may be a bit over encompassing. In any case, anyone who is looking to issue, and even those who have already issued, digital assets needs to read and fully understand the guidance provided in these two releases to make sure they stay on the right side of the SEC.

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