Tokens and Securities

A timeline on the criteria used to qualify tokens as securities

Timeline of the different stages and criteria

When it comes to US legislation regulatory frameworks for tokens, there are three stages for token legal qualification that came into place. We will talk about each stage and the criteria that came into place and additionally give summaries of the specific cases that were investigated.

2017 - Stage 1

Criteria 1: The Howey Test

The first stage was in 2017 when the HOWEY test was first applied to tokens. The HOWEY test is a simple three-criteria test:The three prongs are:

(1) an investment of money - This criterion involves determining whether an asset involves an investment of money. If there is no investment of money, then the asset cannot be a security.
(2) in a common enterprise - This criterion involves determining whether investors' fortunes are linked together with the fortunes of the promoter or other investors. If they are, then it is likely a common enterprise.
(3) with an expectation of profits predominantly from the efforts of others. - This criterion involves determining whether there is an expectation of profits from the investment. If there is, then the asset may be a security.

This ruling set an important precedent for how token projects would be evaluated under U.S. securities law, and it has since been used as a guide for subsequent investigations and regulatory actions.

Case Summary: The DAO

2018 - Stage 2

Criteria 2: Distribution and marketing of the tokens

In 2018, regulators added a new criterion to determine whether tokens qualify as securities. It focuses on the way tokens are distributed and marketed, in addition to the three criteria outlined in the Howey Test.

Distribution:

The way tokens are distributed refers to the process by which they are offered and sold to investors could be a violation of securities laws. Examples are:

if the token is sold through an initial coin offering (ICO) that is not registered with the SEC
if the distribution of tokens is limited to a small group of investors who have the ability to control the market price of the token, this could be considered a violation of securities laws