On Sept. 24, 2020, U.S. Rep. Tom Emmer (R-Minn.) introduced a bill called the Securities Clarity Act “to provide a path to regulatory certainty for digital assets and other emerging technologies under securities law.” Unlike previous attempts at crypto-friendly federal legislation, I believe the Securities Clarity Act deserves support from the crypto community at large, for the following reasons.
The Securities Clarity Act does two things:
1. It defines an “investment contract asset” as:
an asset, whether tangible or intangible, including assets in digital form— (A) sold or otherwise transferred, or intended to be sold or otherwise transferred, pursuant to an investment contract; and (B) that is not otherwise a security [under section 2(a)(1) of the Securities Act of 1933].
2. It includes the following language in all applicable legislative definitions of a security:
The term "security" does not include an investment contract asset.
That’s the whole bill.
The Securities Clarity Act is technology- and asset-agnostic
The Securities Clarity Act doesn’t care if your digital asset is on the Bitcoin network, the Ethereum network or any other blockchain network. In fact, it doesn’t even apply strictly to digital assets. Just as the tracts of farmland with orange groves in SEC v. W. J. Howey Co. (which gave us the Howey Test, the default way to determine whether something is an “investment contract”) weren’t securities, unless they have special characteristics, any other assets sold or transferred pursuant to “investment contracts” would not be considered securities under the Securities Clarity Act.
The Securities Clarity Act is not overly broad
Previous federal legislative and regulatory “blockchain initiatives” (including the Token Taxonomy Act and the Token Safe Harbor) have been far too broad, in my opinion, effectively carving out special exceptions for sales of digital assets that might otherwise be considered securities transactions and asserting that “securities laws don’t apply because … well, blockchain.” These efforts have been further complicated by relying on technical concepts like “distributed digital ledger” and “decentralization” as part of their framework. Even in our own industry, there is often a lot of confusion as to the correct meaning of “decentralization.” Do we really want federal judges and bureaucrats to tell us what it means?
The Securities Clarity Act doesn’t change the application of the Howey Test
One of the greatest things about the Howey Test, at least in my opinion, is its flexibility. The Securities Clarity Act doesn’t change that. For example, even if the Securities Clarity Act had been adopted and in effect at all relevant times, the recent federal court ruling that Kik’s token sale violated U.S. securities law would not have come out any differently. The act does not try and address the token sales that were the subject of the case, just the status of the tokens themselves.
Although KIN tokens would be considered “investment contract assets” under the Act (and therefore not securities, since the KIN tokens themselves do not have the features of stock, debt or other types of enumerated securities in the Securities Act of 1933), under the facts of the case, Kik told token buyers that KIN would increase in value if Kik raised enough money from the sale of KIN to build and launch the Kin ecosystem. If that’s not promoting “an investment of money in a common enterprise with an expectation of profits from the efforts of others” then I don’t know what is.
Winners and losers
As with all federal legislation, there will be winners and losers if the Securities Clarity Act becomes law.
First, cryptocurrency exchanges would be the biggest winners because their analysis of whether a given digital asset is (or is not) a “security” would become much more straightforward. It would be, “Does the digital asset itself (separate from the manner in which it was sold) resemble any of the more traditional types of securities listed in the Securities Act?” If not, then the digital asset will not be a “security.”
Second, sellers of digital assets would also win because it would be easier to get tokens listed on exchanges (although as the Kik example above shows, just because a seller’s tokens aren’t securities, doesn’t mean that the seller wasn’t still offering investment contracts and – if those offers were made to the general public without registration or an available exemption – then those transactions would violate the Securities Act of 1933).
And three, because sellers of digital assets would have a much easier time getting their tokens listed on exchanges, the biggest losers under the Securities Clarity Act would be lawyers – such as myself – whose practice includes drafting opinion letters for token issuers who seek to have their tokens listed on exchanges.
But that’s okay, because the crypto industry has been very good to me the past few years. If I lose some business because of the passage of this bill, I am in no position to complain. Following the legal one-two punch suffered by crypto over the past few weeks (i.e., the previously mentioned Kik decision and the filing of federal charges against BitMEX for attempting to evade U.S. regulations), our industry desperately needs clarity and this bill, if adopted, would go a long way in achieving that.