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Lawyers for SEC & Digital Assets Compliance

Experienced SEC & Digital Assets Compliance Team

Do you have question regarding the regulation of or reporting obligations for digital assets? If you would like defense or compliance advice on protecting or securing your digital assets, give our team a call today.

The SEC is taking a very broad approach with respect to actors and conduct under its jurisdictional authority. It has manifested its intent to regulate as well as go after individuals and entities dealing with digital assets and allegedly harming U.S. investors and/or U.S. capital assets.

When dealing with digital assets, the SEC has made the task of finding the “securities” link an easy one. In other words, as soon as the SEC asserts its jurisdiction and the reasons for such jurisdiction, it can both regulate and investigate digital assets.

Do not let your project or business involving digital assets fall prey to this increased regulatory scope and investigative tendency. Let us help you.

At Oberheiden, P.C., we have an experienced team of securities law attorneys who are also knowledgeable in digital assets—including the current position of federal agencies with respect to such assets, the effect of novel technologies on businesses, and upcoming legislative proposals regulating digital assets.

Let´s find ways to reach and maintain compliance or fight a federal investigation. Put Oberheiden, P.C. on your side today to fight for your reputation and business.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Michael Koslow
Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

The SEC and Regulating Digital Assets

The term “digital asset” is broad. Relevant here, a “digital asset” refers to a type of asset that is issued, transferred, or stored using blockchain technology or other distributed ledger. This includes, for example, coins, tokens, NFTs, tokenization projects, and virtual currencies.

In order for the SEC to have jurisdiction over a digital asset, then must be some “securities” link or connection to something under which the SEC can properly assert its jurisdiction.

In cases where the answer is less clear or where the SEC is dealing with novel technologies and new forms of assets such as coins and tokens, the SEC uses the Howey Test.

This Test, which we explain in greater detail below, tell us whether the SEC has jurisdiction. The SEC has made clear on this topic that digital assets possess the same economic realities as traditional securities even though they may be created from or based on completely different forms.

Under this approach, the SEC asserts that its jurisdiction is proper despite the lack of an explicit authorization over digital assets from Congress.

Therefore, in addition to regulating tradition securities areas such as securities, issuers, brokers and dealers, and exchanges, the SEC could—in certain circumstances—assert jurisdiction over digital asset mining activities, decentralized finance (“De-Fi”), and digital asset lending services, as some primary examples.

The “Howey Test” Explained

If the digital asset in question satisfies all four of the below factors, then it is deemed an “investment contract” and can be regulated by the SEC just like any traditional security.

Alternatively, if one or more of the below “prongs” fails to be satisfied, then the digital asset is not an “investment contract” and therefore not a “security.”

An investment of money

This prong is easy to satisfy. It is typically met when an individual or entity offers or sells a digital asset—usually in the form an initial coin offering, or ICO.

Because this transaction involves a purchase of the digital asset in exchange for value—whether that value comes in the form of fiat currency, cryptocurrency, or other consideration—it is an investment of money.

In a common enterprise

This prong is also typically satisfied when determining if the digital asset is an “investment contract.” It generally requires some form of “commonality” that ties the investors´ funds to those of other investors within the project.

The pooling of assets for a common purpose or the connection of the digital assets to all the investors´ digital assets or to the success of the issuer´s efforts are ways to satisfy this element.

With the expectation of profits

This is a challenging prong to satisfy and is the source of much debate and litigation. In simple terms, the expectation of profits refers to the investors´ anticipation for a financial return on their initial investment.

This profit expectation can be in the form of capital appreciation resulting from the initial investment or from the investor´s participation in earnings of the project or business from the use of the investor’s contribution.

If the investor expects to realize a profit based on general market conditions or based on the supply and demand of the digital asset, then this is generally not sufficient to be considered an “expectation of profits” under this prong.

Derived solely from the efforts of others

Like the third prong, this prong too presents many issues. In cases where the investor relies on the managerial efforts of a third party and the third party´s efforts affect the success of the company (and therefore the investor’s profit), this prong is more likely to be satisfied.

The key to this prong is whether the investor is relying on another party´s efforts to realize a profit. The more the investor relies on others and the less the investor participates in the investment, the easier it is to fulfil this element.

Another key is asking whether these efforts are managerial in nature or merely ministerial. If the efforts of the third party were managerial and, therefore, essential to the success of the investment, then this prong is likely satisfied.

Agreements Involving Digital Assets for “Consumption”

Digital assets that are issued or that involve a utility to investors are less likely to be considered “securities.” Because of this, these types of contracts are not securities and do not need to register or be exempted from registration.

Examples of contracts or agreements for “consumption” involve instances where businesses develop a digital asset to be used only by customers within the business´ platform and only for specific purposes—such as purchasing or selling products.

A key here to differentiating between “securities” and contracts for “consumption” is determining whether the use of the digital asset is limited to the business´ (or issuer´s) platform. If the services are limited to a closed ecosystem of users within an online platform, the digital asset is less likely to be considered a “security.”

That said, it is important to note that even if the above “consumptive” purposes are satisfied and the digital asset can only be used in limited ways on the same platform, there may be other attendant circumstances that push the digital asset more towards a “security.”

Because of this, a thorough and comprehensive analysis by an attorney experienced in differentiating utility tokens (not “securities”) from security tokens (deemed “securities”) is essential.

Need Advice with Digital Asset Compliance?

Are you considering a project involving digital assets such as an ICO? If so, it is very possible that this may implicate the federal securities law and obligate you to comply with various SEC registration, reporting, and disclosure requirements.

Before you undertake such a venture, it is important to take a careful analysis of your compliance obligations.

At Oberheiden, P.C., we can undertake this analysis for you. Our team of SEC Digital Asset Compliance attorneys can also structure your digital asset offering in a way that avoids the need to register with the Commission.

Do not take such a big step without securing the advice from an experienced team of attorneys.

Call or contact us today for a free and confidential consultation.

Why Clients Trust Oberheiden P.C.

  • 1,000+ Cases Handled
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  • Experienced Trial Attorneys
  • Former Department of Justice Trial Attorneys
  • Former Federal Prosecutors, U.S. Attorney’s Office
  • Former Agents from FBI, OIG, DEA
  • Cases Handled in 48 States
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