The US Securities and Exchange Commission (SEC) has given further guidance on security laws, the Howey test, and how they will apply regulation to cryptocurrency token sales.
In a speech delivered at the University of Missouri School of Law, Hester Peirce, an SEC commissioner known for supporting crypto, stated that the securities regulator was preparing “some supplemental guidance” for firms planning to launch initial coin offerings. Peirce explained that SEC’s guidance would help companies determine “whether their crypto-fundraising efforts fall under the securities laws.”
Peirce said there’s “need to tread carefully” as token sales are structured differently from traditional security offerings. This is because of the decentralised nature of token sales – tokens are not necessarily controlled by a single entity in the same way that traditional securities are, and this is part of the challenge. At the moment, the broad-brush security regulation that the SEC fall back on is the Howey test.
The Howey test is a US Supreme Court case that is used for determining whether transactions should be deemed as a security. Determined in 1946, and supposed to give regulatory clarity, its applications to cryptocurrencies has been challenging to say the least and it has provided anything but clarity in recent years.
In November 2018, William Hinman, the SEC director of corporation finance, had acknowledged that there needs to be more guidance as to how securities laws apply to cryptoassets and other types of investments. Hinman had said that the SEC would be releasing information in “plain English” for crypto firms planning to issue their own tokens.
Peirce concurred with Hinman and said that the SEC is currently trying to determine when and how new crypto regulations should be introduced, and she had a proactive message: “If we act appropriately, we can enable innovation on this new frontier to proceed without compromising the objectives of our securities laws – protecting investors, facilitating capital formation, and ensuring fair, orderly, and efficient markets.”
She conceded that the SEC can, at times, be “impulsive” when responding to crypto and blockchain projects, and on a positive note she said: “We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences.”