As participants in the digital asset markets that are doing our best to comply with the vast patchwork of potentially relevant regulations in the US, we are wary of those digital assets tainted by a SEC charge or the specter of a potential SEC enforcement matter. Buying or selling such assets can be fraught with legal questions and peril. In an environment where there are other serious questions about the legitimacy of the business, these issues simply add kerosene to a 5-alarm fire. Ripple (XRP) comes to mind as a digital asset with questions about its legitimacy.
Ethereum (ETH) was another digital asset that had legitimacy questions surrounding it. It was first sold to purchasers through a crowdsale, with the proceeds being used to fund development of the blockchain. This occurred in 2014. This marketing and sale of ETH would probably have qualified the crowdsale of ETH as a covered offering under the Howey test: it is an investment of money; there is an expectation of profits from the investment; the investment of money is in a common enterprise; and any profit comes from the efforts of a promoter or third party.
Yet, as of 2018, in comments made by William Hinman, Director, SEC Division of Corporate Finance at the Yahoo Finance All Markets Summit he stated that ETH no longer represented a security offering. What happened?
In Hinman’s opinion, ETH had become sufficiently “decentralized.” Since the value of ETH is no longer determined by the managerial efforts of the promoter, it had lost all auspices of a security. As Hinman stated, the “material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite [material information] disclosures becomes difficult, and less meaningful.” Mr. Hinman goes on to say that: “And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.”
Of course, the then “decentralized” asset or commodity can be re-packaged into a fund investment or some other type of package – and the same question arises as to whether it is a security.
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