The United States Securities and Exchange Commission (SEC) has played a major role in shaping the ways that regulations affect the cryptocurrency industry, particularly within the last two years. The Commission has issued hundreds of subpoenas, a number of no-action letters, and fought a number of legal battles that have helped bring much-needed regulatory clarity to the space.
However, there is still quite a bit of progress that needs to be made. Several recent instances have revealed that more understanding of how existing regulations apply to the space is still necessary.
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Recently, Finance Magnates spoke to securities lawyer Samuel Katz about how investors and token issuers can survive (and even thrive) under the SEC’s jurisdiction.
Katz is a partner at Nellis & Katz LLP, a law firm based in New York. He also acts as the VP and General Counsel for Rivver, Inc., a startup that is using distributed ledger technology to digitize interest in private funds and fund administration. As a lawyer, Katz specializes in issues related to US securities law, fund formation and venture capital, with a focus on digital assets and securities.
Samuel Katz will also appear as a panelist at the upcoming Barcelona trading conference on July 10th and 11th. For more information about the conference, click the image below.
”Most tokens that we would look at other than, say, Bitcoin and Ether, are very likely to be securities under US securities laws.”
When we asked Katz to give us a rundown on the basics of what crypto industry participants need to know about securities laws, he said that the number of tokens that can be legally classified as securities is likely larger than most people realize.
“What crypto investors need to know about US securities laws at this point is that in the US, to a large degree, most tokens that we would look at other than, say, Bitcoin and Ether, are very likely to be securities under US securities laws.”
“Therefore, [these assets] are subject to the securities laws of the United States, which govern everything from the initial offering of the securities through secondary trades themselves, and the facilitation of secondary trades, which could include exchanges.”
“There are certain other types of assets that might be governed by other regulatory regimes, such as stablecoins, and other types of tokens that might be subject to other regimes that are outside of the securities laws.”
A Token’s Functionality Isn’t Necessarily an Indication of Whether or Not It’s a Security
So what exactly makes a token a security? “The SEC has provided some guidance as to when a token might not be a security–but in a certain sense, it’s very limited,” Katz explained.
“I’m sure that [most people] have heard of the Howey Test many times, and it’s not necessary to go over that again. But in principle, the SEC is looking for the types of instruments that people are looking to profit off of through the work of a small group of people.”
“That’s really the principle matter, if we take a look, for example, at what the SEC is claiming in its complaint against KIK with respect to the KIN tokens,” Katz continued.
1/Topic 1: Paragraph 114 of the Complaint sets out the SEC’s argument on the expectation of profits, it’s supported by much more than the CEO’s statement and includes statements made in various contexts, including the fact that it would be listed on exchanges. pic.twitter.com/f3TxzT6bbC
— Samuel Katz (@iamsamkatz) June 11, 2019
And at the same time, “we’re seeing that the SEC is going after people. There have been a few public settlements with the SEC, but I think there’s a lot more going on in the background. It was even reported a long time ago that the SEC had sent out hundreds of subpoenas to ICO issuers and exchanges. Those investigations are ongoing; the SEC is very active.”
“So, you need to be extra careful. We will definitely be seeing–over the next few months to a year–a lot more settlements with the SEC, or SEC actions against companies, whether it’s exchanges, companies, people who may be violating broker-dealer laws, all sorts of things like that.”
This was an excerpt. To hear Finance Magnates’ full interview with Sam Katz, click the Soundcloud or Youtube links.
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