SEC's Crypto Token Framework Falls Short of Clear and Actionable Guidance

The SEC's new guidance outlines how it will apply the decades-old Howey test to crypto assets.

The SEC published its "Plain English" guidance nearly six months after William Hinman, the SEC Director of Corporation Finance, announced the regulator was developing it.

"While it's helpful and it's good to see the SEC remains focused in this area, it's not quite as useful as a law or a rule or even formal guidance would be," said Andrew Hinkes, an attorney with Carlton Fields and general counsel for the investment bank Athena Blockchain.

Jake Chervinsky, an attorney with Kobre Kim, told CoinDesk via email that in his view, the SEC used the term to make clear to projects that their tokens can qualify as securities even if the original token issuer is not involved with any expectation of profit.

"In other words, if Company A sells a token on the promise that purchasers will profit from Company B's efforts, the token could still be a security even if Company A has nothing to do with the project after the token is issued. I do think there could be some token projects in this situation," he said.

"Today's SEC Framework provides additional clarity but it does not give the industry all the answers. The 'Other Relevant Considerations' on page 9 and 10 illustrate that digital assets don't fit neatly into the Howey test and there are additional factors from cases that the industry needs to consider."

The same day as issuing the framework, the SEC also published its first-ever "No-action letter," allowing TurnKey Jet LLC to initiate a token sale.

Returning to the framework, Kristin Smith, the director of the Blockchain Association, a D.C.-based lobbying group, told CoinDesk in a statement that while the group appreciates that the SEC is looking at how to apply securities laws to the crypto space, "This guidance presents a framework that will stifle investment in and innovation of open blockchain networks in the United States."

Still, Chervinsky said, the framework does provide a deep, thorough analysis of how the Howey test applies to digital assets, and is clearer than any statements the SEC has previously issued.

"The Framework effectively replaces the DAO Report as the SEC's go-to explanation for whether and when digital assets qualify as regulated securities, and by including a list of crypto-specific characteristics relevant to the Howey analysis, the Framework is many times more helpful than the DAO Report ever was."