The staff of the SEC’s Division of Corporation Finance has issued no-action relief that allows an initial coin offering without registration. The no-action relief relies on an opinion of counsel that the underlying digital tokens are not securities as well as several other conditions including (i) the sponsor will not further develop the platform, (ii) the tokens will be immediately useable and functional, and (iii) the tokens are not marketed in a manner that emphasizes their potential for increased market value. In a companion release, the SEC Strategic Hub for Innovation and Financial Technology (FinHub) issued guidance about how to determine if an ICO is an offering of securities under the applicable Howey test. FinHub relies heavily on whether the sponsor of the network will engage in further development of the network or digital asset so as to generate increased market value for investors.
Up until now, the SEC has taken the position that ICOs are securities offerings, subject to the Securities Act’s registration and disclosure requirements. This no-action letter and companion guidance suggest that the SEC may back off its aggressive position and allow the digital token world to evolve organically. What is unclear is whether any ICO sponsor should go forward without a no-action letter.