SEC Alert - Ether Is Not A Security


On June 14, 2018, the Director of the SEC's Division of Corporation Finance, William Hinman, gave a speech on the regulatory landscape of digital tokens.  In the speech, Mr. Hinman made a long-awaited comment suggesting that Ether is not a security, stating:

"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." 

Importantly, the speech suggests that this conclusion could be reached with respect to other digital tokens as well:

"Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins."

Moreover, the speech indicates that the SEC is open to supporting the proposition that decentralization can change the nature of a securities offering:

"But this also points the way to when a digital asset transaction may no longer represent a security offering. If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful."  

We are pleased that the SEC is starting to address some of the harder questions facing the industry.  As recently as this past Monday while speaking on a panel next to the new Senior Advisor for Digital Assets and Innovation at the SEC, we pointed out that more regulatory guidance is needed with respect to questions like:  Can something that originated in a securities offering transition to the point of not being a security?  If so, when does that happen?  When does it essentially transition from a securities transaction to a consumer transaction?        

Of course, the speech did not address all of the open questions and nuances surrounding securities regulation in the digital token space, but Mr. Hinman's remarks show that the SEC continues to be thoughtful in analyzing how to apply securities laws to digital tokens in a way that supports innovation but also protects investors.

A transcript of the speech is available here.  

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