SEC Agrees that “Tokens” to Pay for Services Are Not “Securities”

Commentary / Steven Lofchie

On the one hand, it is certainly a positive that the SEC is announcing an intellectual framework for determining whether a “digital asset” (perhaps better known as an “Initial Coin Offering” or “ICO”) is within the definition of the term “security.” On the other hand, the framework definitely casts a very broad net, which no doubt was intended.

As to the question of whether digital assets involve a “common enterprise,” the SEC simply says that “[b]ased on our experiences to date, investments in digital assets have constituted investments in a common enterprise because the fortunes of digital asset purchases have been linked to each other or the success of the promoter’s efforts” (at fn. 11). There is not much analysis there. One could, for example, argue that a digital newspaper subscription constitutes a digital asset because the value of the subscription is likely dependent upon the publisher’s ability to generate other subscriptions and thereby to turn out a good digital newspaper.

On the question of whether cryptocurrencies are securities, the framework says that, to fall outside of the definition, the digital asset must “actually operate as a store of value that can be saved, retried, and exchanged for something of value at a later time.” As to digital assets generally, “any economic benefit that may derived from appreciation [must be] incidental to obtaining the right to use [the asset] for its intended functionality.”

It is fairly well accepted that certain of the major cryptocurrencies are not securities. That said, it is not at all clear that any newly issued cryptocurrency would be able to meet the SEC’s conditions so as not to be a security.

Although the SEC has cast a very wide net with this analysis, it also published a no-action letter providing at least one example as to when a digital asset would not be a security. See SEC Staff Advises Turnkey Jet Tokens Are Not Securities.


The SEC provided a “framework for analysis” to help market participants evaluate whether the federal securities laws apply to the offer, sale or resale of a specific digital asset.

The framework is based on the “Howey” case, which found that a security exists where there is “[(i)] an investment of money [(ii)] in a common enterprise [(iii)] with a reasonable exception of profits [(iv)] to be derived from the efforts of others.” As to the first two elements, the SEC states that, generally, persons pay in some way for the digital asset and “in evaluating digital assets, [the SEC] has found that a ‘common enterprise’ typically exists.”

The report focuses on the third element, whether the purchaser of the asset may reasonably expect to profit from the purchase of the assets, (i.e., by having the expectation – or at least the hope – of selling the asset to someone else at a higher price); and the fourth element, whether the purchasers of the asset depend on the efforts of others (finding that they generally do, because a third party is creating and maintaining the technology).

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