Director Bill Hinman Expands on SEC’s Approach to Crypto

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According to Forbes, Bill Hinman partook in a fireside chat at Cardozo Law School this week, where he “covered a range of topics related to the regulation of digital securities.” Hinman told Cardozo that the SEC continues to examine their approach to digital securities, and how current securities law should apply to cryptocurrencies and blockchain.

Forbes elaborated that “Much of Director Hinman’s comments amplified the facts and circumstances test which is embodied in the Howey test. He touched on the fact that because the United States is a common law country and not a civil law jurisdiction many of our rules are based on precedent. In the blockchain context, this means that U.S. securities laws don’t provide bright line rules for determining what is or is not a security.”

The Howey test originates from the landmark Supreme Court case of SEC v. W.J. Howey Co. Justice Frank Murphy in the majority opinion wrote, “an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.” Further, “The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value.”

In the US, the law surrounding the issue is common law, meaning that it comes from precedent from the courts. In other countries, their laws on these issues are codified, making them civil law countries. Director Hinman noted at Cardozo that many civil law countries have codified the rules that the SEC is currently going by.

Both Hinman and Andrew Hinkes, an attorney for Carlton Fields, believe that codified rules aren’t the best way to go for this issue right now. They think that entrepreneurs will try to push the boundaries as much as possible in these cases, and that codified rules just won’t work well because of the great variance in facts and circumstances in different crypto offerings. Andrea Tinianow writes, “In considering when in the lifecycle of a blockchain company it is appropriate to issue tokens, Director Hinman offered that token issuances should come after companies build out their infrastructure through traditional fundraising methods. If you create your network first and then offer a token, it could save you heartache down the road.  He also urged folks to retain strong counsel, which is good advice.”

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