Upon the eighteenth day of May in the year 2023, Tom Emmer (R-MN), the steady hand that guides the House Majority Whip, and Representative Darren Soto (D-FL), both put forth the bipartisan initiative known as the Securities Clarities Act (hereafter referred to as “the Act”). The intent, etched into the Act’s very fabric, is to shine a light on the understanding that an asset, even one in digital form, sold under the auspices of an investment contract, need not be labeled a security, unless it inherently is one.
The Act stands as a bulwark against prevailing concerns. Of late, the U.S. Securities & Exchange Commission (SEC) in its enforcement endeavors, has extended its jurisdictional reach, positing the flawed notion that a digital asset, once sold as part of a securities offering, is henceforth and forever a security. The SEC further argues that digital assets sold for fundraising purposes years ago still bear the securities stamp today, even when the network is fully operational and the assets hold functional value.
Numerous digital asset enterprises now stand their ground against the impending wave of SEC enforcement actions and private party civil lawsuits. They contest the SEC’s stance, pointing to historical inaccuracies and inherent flaws. However, the much-needed relief and consistency can only come through the intervention of congressional measures like this Act, shedding light on this technical and unsettled area of law.
- EMBRACING CRITICISM OF THE HOWEY TEST THROUGH THE ACT
In the United States, there exists no federal law or regulation that specifically demarcates the conditions under which a digital asset is termed a security. Instead, the SEC, much like a seasoned mariner, has relied on the four-part Howey Test, a tool first put to use in SEC v. W.J. Howey Co. This test investigates whether an asset’s offer and issuance involves (i) an investment of money; (ii) in a common enterprise; (iii) with a reasonable expectation of profits; and (iv) whether these profits are expected to arise from the entrepreneurial or managerial efforts of others.
Nevertheless, the Howey Test, the compass by which the SEC has navigated the crypto asset waters, has come under severe scrutiny. Various industry players, litigants, government officials, and at least one SEC commissioner have cast doubt on the Howey Test’s aptness for secondary-market transactions. They argue for a distinction between an investment contract transaction, which could be a securities offering, and the underlying asset, which might not be a security. Even officials within the SEC have conceded that a token, upon achieving sufficient decentralization, may no longer qualify as an investment contract.
The Act responds to these criticisms of the Howey Test’s application to digital assets. It proposes a specific amendment to the Securities Act of 1933 to:
- Specify that the term “security” does not encompass an “investment contract asset”, and
- Define an “investment contract asset” as “an asset, whether tangible or intangible, including assets in digital form” sold or transferred in line with an investment contract and is not otherwise a security.
Further, the Act suggests similar amendments to the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Securities Exchange Act of 1934, and the Securities Investor Protection Act of 1970.
Therefore, the Act acknowledges that while certain fundraising arrangements may be seen as “investment contracts” and thus classified as securities, the underlying assets sold under these arrangements are not necessarily securities and do not acquire that status simply because they are sold within the framework of an investment contract.
- LENDING ESSENTIAL CLARITY TO THE DIGITAL ASSET INDUSTRY THROUGH THE ACT
The Act does not just recognize and address the criticism of old doctrines, but it also sets out to clear the fog shrouding the digital asset industry. Many a player in this field have long sought regulatory guidance and rule-making, a sturdy lighthouse in the storm to guide compliance. The Act gives voice to digital asset leaders championing clarity, echoing their belief that clear rules of the road are essential. It states that “establishing a predictable legal environment for tokens is among the most urgent issues facing the digital marketplace today,” and “the lack of clarity continues to pose significant challenges for companies operating within the United States.”
Adding to its firm footing, the Act draws support from both sides of the aisle, born from the combined efforts of a Republican, Representative Emmer, who wields the whip for the House Majority, and a Democrat, Representative Soto, a standing member of the Committee on Energy and Commerce. Moreover, the Act finds allies in the Coin Center, the Blockchain Association, the Chamber of Digital Commerce, and the Crypto Council for Innovation, reinforcing its standing within the digital assets industry.
Rest assured, we will remain vigilant, monitoring the unfolding developments in the digital assets and blockchain technology industry. As your trusted advisers, we commit to delivering timely updates, aiding your navigation through these evolving times.
However, it is crucial to approach the Act with a comprehensive understanding of its provisions and their impact on each unique circumstance. At Montague Law, we emphasize the importance of seeking qualified legal counsel to navigate the complexities of compliance and regulatory strategies specific to the crypto and blockchain industry.
To stay informed about the latest developments and updates regarding the Securities Clarities Act and its implications for crypto and blockchain companies, we invite you to regularly follow the Montague Law Blog. Our team of legal experts will provide in-depth analysis, timely updates, and practical insights to guide your decision-making and ensure compliance with evolving regulatory requirements.
At Montague Law, we remain committed to empowering digital asset businesses through our expertise in securities law and blockchain technology. Together, let us navigate the regulatory landscape and embrace the opportunities presented by this groundbreaking legislation.
Stay tuned to the Montague Law Blog for a deeper understanding of the Securities Clarities Act and its impact on the crypto and blockchain industry.
