Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

SEC Advises Bitcoin and Ether Are Not Securities

Author: Dan Brecher

Date: July 17, 2018

Key Contacts

Back

According to SEC, Bitcoin and Ether Are Not Securities

The Securities and Exchange Commission (SEC) does not consider bitcoin and ether to be securities, according to SEC Division of Corporation Finance director Bill Hinman. The pronouncement brings additional clarity to how the agency plans to regulate the growing cryptocurrency market.

SEC Advises Bitcoin and Ether Are Not Securities
Photo courtesy of Andre Francois (Unsplash.com)

Hinman addressed the oversight of the popular cryptocurrencies at Yahoo’s All Market Summit: Crypto in San Francisco, California. “Based on my understanding of the present state of ether, the Ethereum network, and its decentralized structure, current offers and sales of ether are not securities transactions,” Hinman said. “And, as with bitcoin, applying the disclosure regime of the federal securities laws to current transactions in ether would seem to add little value.”

SEC’s Prior Guidance on ICOs

As we have discussed in prior articles, virtual coins are created and disseminated using distributed ledger or blockchain technology. In an initial coin offering (ICO), buyers may use U.S. dollars or virtual currencies to purchase virtual coins or tokens. The capital raised from the sales may be used to fund the development of a digital platform, software, or other projects. In addition, investors may use the virtual tokens or coins to access the platform, use the software, or otherwise participate in the project. After they are issued, the virtual coins or tokens may also be resold to others in a secondary market on virtual currency exchanges or other platforms. 

Last year, the SEC advised that many ICOs are securities and, therefore, fall under the purview of federal securities laws. In reaching this conclusion, the SEC applied the U.S. Supreme Court’s long-standing “investment contract” test. In SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946), the Court defined “investment contract” as a contract, transaction or scheme in which (i) a person invests money in a common enterprise; (ii) with a reasonable expectation of profits; (iii) to be derived from the entrepreneurial or managerial efforts of others. As explained by the Court, this definition embodies a “flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

The SEC guidance also made it clear that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. In recent enforcement actions, the SEC has pursued entities that failed to register ICOs, as well as entities that outright defrauded investors. In his speech, Hinman reaffirmed the SEC’s position on ICOs. “Simply labeling a digital asset a ‘utility token’ does not turn the asset into something that is not a security,” he stated. Nonetheless, Hinman also acknowledged that there are ways to structure digital assets so they constitute consumer goods rather than securities. 

Applying Investment Contract Test to Bitcoin

As Hinman explained, the primary issue in determining whether cryptocurrencies and ICOs are securities is the expectation of a return by a third party. “Primarily, consider whether a third party — be it a person, entity or coordinated group of actors — drives the expectation of a return,” Hinman explained.

In the case of bitcoin and ether, Hinman noted that the answer to that question is no.

“If the network on which the token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract,” Hinman said.

Of course, that doesn’t mean that the cryptocurrencies could never qualify as a security. “Even digital assets with utility that function solely as a means of exchange in a decentralized network could be packaged and sold as an investment strategy that can be a security,” Hinman noted. “If a promoter were to place Bitcoin in a fund or trust and sell interests, it would create a new security. Similarly, investment contracts can be made out of virtually any asset (including virtual assets), provided the investor is reasonably expecting profits from the promoter’s efforts.”

Investment Contracts vs. Consumer Goods

To further clarify how to properly characterize a digital asset, Hinman outlined several factors to consider in assessing whether a digital asset is offered as an investment contract. The analysis centers largely on the role of any third party, as well as the economic substance of the transaction. The factors include, but are not limited to:

  • 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?
  • Has this person or group retained a stake or other interest in the digital asset such that it would be motivated to expend efforts to cause an increase in value in the digital asset? Would purchasers reasonably believe such efforts will be undertaken and may result in a return on their investment in the digital asset?
  • 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? Does the promoter continue to expend funds from proceeds or operations to enhance the functionality and/or value of the system within which the tokens operate?
  • Are purchasers “investing,” that is seeking a return? In that regard, is the instrument marketed and sold to the general public instead of to potential users of the network for a price that reasonably correlates with the market value of the good or service in the network?
  • Are independent actors setting the price or is the promoter supporting the secondary market for the asset or otherwise influencing trading?
  • Is it clear that the primary motivation for purchasing the digital asset is for personal use or consumption, as compared to investment? Have purchasers made representations as to their consumptive, as opposed to their investment, intent? Are the tokens available in increments that correlate with a consumptive versus investment intent?
  • Are the tokens distributed in ways to meet users’ needs? For example, can the tokens be held or transferred only in amounts that correspond to a purchaser’s expected use? 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?
  • Is the asset marketed and distributed to potential users or the general public?
  • Are the assets dispersed across a diverse user base or concentrated in the hands of a few that can exert influence over the application?

In his speech, Hinman highlighted that determining whether an ICO qualifies as a security is often fact dependent. Accordingly, the SEC is prepared to offer assistance. “We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use.”

For businesses interested in conducting an ICO, the SEC’s latest guidance, as set forth in Bill Hinman’s remarks, provide a roadmap for structuring token sales so that they are exempt from U.S. securities registration requirements. As highlighted above, one of the key issues is the rights, expectations, and participation of token holders. For detailed guidance, it is always advisable to consult with an experienced New Jersey securities attorney.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business post image

The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business

Since his inauguration two months ago, Donald Trump’s administration and the Congress it controls have indicated important upcoming policy changes. These changes will impact financial services policies and priorities. The changes will particularly affect cryptocurrency, as well as banking rules and regulations. Key Regulatory Changes in Cryptocurrency For example, in the burgeoning cryptocurrency business environment, […]

Author: Dan Brecher

Link to post with title - "The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business"
Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1 post image

Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1

The retail sector has experienced a wave of bankruptcy filings over the last year. Brick-and-mortar businesses in financial distress include big-name brands like Big Lots, Party City, The Container Store, and Vitamin Shoppe. When large retailers seek bankruptcy protection, they are not the only businesses impacted. Landlords can be particularly hard hit. While commercial landlords […]

Author: Brian D. Spector

Link to post with title - "Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1"
How Understanding Bankruptcy Trends Can Benefit Your Business post image

How Understanding Bankruptcy Trends Can Benefit Your Business

The bankruptcy legal landscape presents both challenges and opportunities for businesses navigating financial distress. Understanding current bankruptcy trends can help businesses make more informed and strategic decisions. Corporate Bankruptcy Filings Trending Upwards Bankruptcy filings continued to trend upwards in 2024. According to statistics released by the Administrative Office of the U.S. Courts, personal and business […]

Author: Brian D. Spector

Link to post with title - "How Understanding Bankruptcy Trends Can Benefit Your Business"
SEC Takes Actions Against Issuers for Failure to File Form D post image

SEC Takes Actions Against Issuers for Failure to File Form D

In December, the U.S. Securities and Exchange Commission (SEC) announced charges against two privately held companies for failing to file a Form D notice, which is generally utilized for exempt securities offerings. Here, the SEC’s enforcement sends a strong message: compliance with regulatory requirements is not optional and failure to comply can have significant consequences. […]

Author: Kenneth C. Oh

Link to post with title - "SEC Takes Actions Against Issuers for Failure to File Form D"
Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda post image

Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda

On February 14, 2025, the Office of General Counsel (OGC) of the National Labor Relations Board (NLRB) under Acting General Counsel William B. Cowen issued Memorandum 25-05, “New Process for More Efficient, Effective, Accessible and Transparent Case handling.” The Memorandum rescinds nearly all of the Memoranda issued by his direct predecessor, Jennifer Abruzzo, setting the […]

Author: Matthew F. Mimnaugh

Link to post with title - "Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda"
What Are FIRPTA Withholding Requirements? post image

What Are FIRPTA Withholding Requirements?

If you purchase real property from a foreign person or entity, you may be required to withhold taxes from your payment to the seller under the Foreign Investment in Real Property Tax Act (FIRPTA). The federal tax law is designed to ensure that foreign sellers pay any applicable capital gains tax on profits realized from […]

Author: Jesse M. Dimitro

Link to post with title - "What Are FIRPTA Withholding Requirements?"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!

Please select a category(s) below: