Recognizing the need for guidance as to the application of US federal securities law for those considering an Initial Coin Offering (ICO), or otherwise engaging in the offer, sale or distribution of a digital asset, the Securities and Exchange Commission released its Framework for “Investment Contract” Analysis of Digital Assets. The Framework represents the views of the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) and is designed to provide additional guidance in areas that the SEC has not previously addressed.

The US Supreme Court’s Howey case and subsequent case law have found that an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. Whether a particular digital asset at the time of its offer or sale satisfies the Howey test depends on the specific facts and circumstances. Price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered “profit” under the Howey test. The Framework provides guidance on how market participants should analyze the specific facts and circumstances surrounding the offer or sale of a digital asset to ascertain if such offer or sale is being made as an investment contract and, therefore, within the purview of the federal securities laws.

The full Framework issued by the SEC is available here.