by Alex Broudy, Technical & Financial Writer
May 24, 2022
In his remarks at the DC Blockchain Summit on March 24, Securitize CEO Carlos Domingo observed that the vast majority of investment opportunities on the blockchain are likely securities under U.S. law. While the regulatory framework governing digital assets continues to evolve, there is a simple way to determine whether something is a security and therefore enforceable by law.
In the United States, the Securities and Exchange Commission (SEC) oversees securities laws, while the Commodities Futures Trading Commission (CFTC) oversees commodities and their derivative products (whether oil, corn, or – increasingly – crypto). While the facts and circumstances of each case vary, the Howey test is often used as a framework to determine whether or not an investment is a security. What’s the Howey test?
For example, tokenized shares in private companies, such as those available through Securitize, are plainly securities under the Howey test: investors buy or trade shares in a common enterprise with a reasonable expectation of profits as the result of work being done by others. When the Howey test is applied to investment contracts on the blockchain such as NFTs, it’s likely that many could also be determined to be securities: NFTs launch under a common enterprise and future profits are expected as a result of trading or other work. How will we know if regulators take this view? Enforcement.
In fact, the SEC recently reported that it nearly doubled the staffing of its enforcement division with the goal of hiring 50 personnel to the Crypto Assets and Cyber Unit by the end of 2022. Stepped up enforcement will help protect everyday investors.
Along with enforcement comes market maturity and enhanced investor protections. As the regulatory environment in which digital assets are growing is clarified by legislation, regulators and enforcement actions, issuers of, investors in and platforms making available those investments will be able to operate with greater clarity. Until then, using the Howey test as a guide to see if an investment is a security should remain a best practice.
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