A bipartisan House bill would help digital assets evade the definition of a security, a move to address long-standing uncertainty surrounding the SEC’s regulation of cryptocurrencies. The July 16, 2021, reintroduction of H.R. 4451, the Securities Clarity Act, comes as the SEC continues to apply an enforcement apparatus designed for securities to the crypto space, drawing protest from Republican commissioners, lawmakers, and industry voices.
The bill is sponsored by Rep. Tom Emmer, a Minnesota Republican, with Democratic Reps. Ro Khanna of California and Darren Soto of Florida signing on as cosponsors.
“There has been an unreasonable approach by regulators as to how federal securities laws should be applied to transactions involving the sale of blockchain-based tokens, and this lack of clarity is hurting American innovation,” Emmer said in a statement. “Between regulation by enforcement and the varying legal decisions regarding the classification of these assets, regulatory uncertainty has hindered the growth of blockchain technology, leaving many to take the technology overseas.”
Emmer’s bill would create a new definition for an “investment contract asset” that would not be considered a security simply because it is sold in a securities offering. The bill defines an investment contract asset as an asset, either tangible or intangible – including digital – that is “sold or otherwise transferred, or intended to be sold or otherwise transferred, pursuant to an investment contract” and is not otherwise a security under the Securities Act of 1933.
To determine whether an asset represents a security, the SEC applies the “Howey test” established in the 1946 Supreme Court ruling in SEC v. W.J. Howey Co. Under that test, a security must involve an investment of money in a common enterprise, with an expectation of profit from the efforts of a third party.
The lack of clear crypto rules continues to fuel division among commissioners, two of whom – Republicans Elad Roisman and Hester Peirce – earlier this month issued a joint statement, criticizing the SEC’s order against Coinschedule, a defunct U.K.-based company that ran a website publicizing digital token offerings. The SEC’s order named Blotics Ltd., the successor to Coinschedule.
The SEC, in its July 14 order, said that Coinschedule violated the securities laws by not disclosing the compensation it received from digital asset security issuers it profiled. The platform profiled over 2,500 different token offerings, some of which the SEC considered securities.
Without admitting or denying the SEC’s findings, the company agreed to pay $43,000 in disgorgement, plus prejudgment interest, and a penalty of $154,434.
Coinschedule, Roisman and Peirce wrote, was obligated under the Securities Act “to disclose that it was compensated for profiling and publicizing those token offerings, but did not do so.”
The two commissioners, however, wrote they “nevertheless are disappointed that the Commission’s settlement with Coinschedule did not explain which digital assets touted by Coinschedule were securities, an omission which is symptomatic of our reluctance to provide additional guidance about how to determine whether a token is being sold as part of a securities offering or which tokens are securities.”
In the void created by lack of clear SEC guidance, Roisman and Peirce wrote that “litigated and settled Commission enforcement actions have become the go-to source of guidance.”
“Providing guidance piecemeal through enforcement actions is not the best way to move forward; if the Commission intends to continue to do so, then we should at least be clear about which tokens we have identified to have been sold pursuant to securities offerings,” they wrote.
This article originally appeared in the July 21, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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