SEC Commissioner Hester M. Peirce criticized the SEC for failing to clarify how it applies the “Howey Test” (SEC v. W.J. Howey Co.) to digital assets used in initial coin offerings (“ICOs”).
Contrary to her prior concerns about the downside effects of overregulating the crypto industry, Ms. Peirce said that the SEC’s “unwillingness to take meaningful action” has actually “stifled” the industry.
In a speech at the Securities Enforcement Forum, Ms. Peirce analyzed the recent SEC guidance on digital assets, Ms. Peirce stating that its efforts to provide clarification have been generally unsuccessful. First, Ms. Peirce stated that the SEC staff’s Howey framework probably would only be understood by a “seasoned securities lawyer.” Specifically, while Howey has only four factors, the framework listed 38 considerations for determining whether a token offering is a securities offering.
Second, Ms. Peirce criticized the first token no-action letter, which gave the “false impression” that it was a “gray area of securities law.” As previously covered, the company TurnKey had been seeking to tokenize gift cards. The letter gave the impression that the securities law is more far-reaching than it is, according to Ms. Peirce, because the token was “clearly not an offer of securities.” Additionally, the letter highlighted non-dispositive factors and so, Ms. Peirce stated, “effectively imposed conditions on a non-security.”
Third, Ms. Peirce stated the SEC Division of Investment Management letter for advisers and funds on digital assets failed to provide meaningful guidance. Ms. Peirce conceded that the letter outlined certain questions that advisers should consider when buying and holding digital assets on behalf of their clients. However, she stated that it did not clarify how advisers can remain compliant with the Custody Rule.
Finally, Ms. Peirce warned that lack of regulatory clarification will push innovation into other jurisdictions.
Commissioner Peirce continues to challenge the SEC’s lack of clarity on the application of the Howey test to ICOs. While it is true that the SEC did issue a position paper on the Howey Test and ICOs (SEC Publishes “Framework” for Determining if Digital Assets Are “Securities”), the purpose of the position paper seems largely to assert broad jurisdiction (lest the SEC be subject to the retrospective accusation of having missed something). In particular, the SEC in that position paper failed even to attempt to define the most important legal question under Howey; i.e., what constitutes a “common enterprise.”
At the same time that the SEC issued its position paper, the SEC staff issued a no-action letter holding that a particular crypto offering was not a “security.” See Subject to Strict Conditions, SEC Agrees that “Tokens” to Pay for Services Are Not “Securities”. This no-action letter did little to resolve the jurisdictional question as the tokens that were the subject of the letter very clearly fall into the class of “stable coins” that are completely linked to the value of the dollar on a one-for-one basis, and so there is no opportunity whatsoever for investment gain. In short, the SEC’s no-action letter simply addressed the most obvious possible case for admitting that it did not have jurisdiction, and failed to address any area of uncertainty.