The Securities and Exchange Commission (SEC) recently issued a statement making it clear that federal securities laws apply to securities issued using new technologies, such as blockchain. The SEC’s Statement on Digital Asset Securities Issuance and Trading highlighted recent enforcement actions falling into three categories: initial offers and sales of digital asset securities (DAS), investment vehicles investing in DAS and those advising on the investment in such securities, and secondary market trading of DAS.
In an initial offering scenario, the SEC focuses on whether the digital assets constitute securities and, if so, what registration requirements apply. The SEC will not treat digital assets differently based on their technological nature. In fact, the SEC has already issued enforcement actions to companies for their unregistered offerings of tokens. The SEC also required the companies to compensate investors who purchased tokens in the illegal offerings.
With respect to investment vehicles investing in DAS and those advising on the investment of such securities, such vehicles are subject to registration requirements under the Investment Company Act of 1940. Also, managers of such investment vehicles are subject to registration requirements under the Investment Advisers Act of 1940.
Finally, exchanges that facilitate the electronic trading in DAS are required to register as a national securities exchange or operate pursuant to an exemption from registration. The SEC will apply a “functional approach” to assess whether a trading system constitutes an exchange. Additionally, entities that facilitate the issuance of DAS in initial coin offerings and secondary trading in DAS may also be a “broker” or “dealer.” Accordingly, such entities would be subject to register with the SEC and become a member of a self-regulatory organization. Again, the SEC will use a functional approach to determine whether an entity qualifies as a broker or dealer. The broker-dealer registration requirements are applicable, even if the entity does not qualify as an exchange.