Business models involving the deposit or transfer of funds into the US or lending to a US...
Entrepreneurs in LatAm: Are you interested in working with Digital Assets?
If you have a company in LatAm and would like to explore issuing digital assets in the U.S., or to U.S. persons (including those who are physically located outside of the U.S.), it is important to keep in mind that the 1933 Securities Act (“’33 Act”) requires all offers or sales of securities to be registered with the Securities and Exchange Commission (“SEC”), unless an exemption from registration applies.
Whether a digital asset (including tokens and coins) would be deemed a security under the ‘33 Act turns to whether any given digital asset would be considered an “investment contract” under the Howey Test. The Howey Test was first established by the U.S. Supreme Court in SEC v. W.J. Howey Co. in 1946. According to the Howey Test, the following prongs should be analyzed at the time a digital asset is first issued: whether the digital asset was acquired through (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits from (4) the managerial or entrepreneurial efforts of others.
Please see below what each prong means:
1. Investment of Money
Although the U.S. Supreme Court initially used the term “money,” U.S. courts subsequently applying the Howey Test have interpreted this element to incorporate investments of assets and things of value other than money, including the payment of cryptocurrency.
2. Common Enterprise
Most federal courts define a “common enterprise” as one where investors pool their money or assets together to invest in a given project.
3. Reasonable Expectation of Profits
Profits can be, among other things, a capital appreciation resulting from the development of the initial investment or business enterprise, as well as a participation in earnings resulting from the use of investors' funds. The tricky part about this prong, is that the expectation on the side of the buyer is relevant, independent from the steps the issuing platform took prior to or at the time of the issuance.
4. Managerial Efforts of Others
In determining the final prong of the Howey Test to digital asset projects, the SEC has relied increasingly on the level of “decentralization” in a given platform. When a company or specific team remains integral to the success of a project, the SEC will likely find that the success of any related digital asset remains dependent on the efforts of such company or team.
The more a digital asset meets the requirements of the Howey Test, the chances that such digital asset will be considered an investment contract and therefore a security under the ’33 Act increases. When a digital asset qualifies as an investment contract, the issuer should file a registration statement with the SEC for the offer and sale of the digital asset to avoid violating Section 5(a) of the ’33 Act.
The issuance and offering of digital assets, including cryptocurrencies and tokens, by a U.S. issuer or to U.S. persons are subject to highly complex regulatory requirements in the U.S. both at the Federal level and at the State level. Among the Federal laws, there are two sets of rules: (1) Securities Rules: 1933 Securities Act (or ‘33 Act), 1934 Security Exchange Act and, the regulations thereunder enacted by the Securities and Exchange Commission, and (2) Commodities Rules: the Commodities Exchange Act of 1934 and Regulations enacted by the Commodities Futures Trading Commission.
It is critical for companies in the region interested in issuing digital assets in the U.S. or to U.S. persons to navigate the applicable U.S. laws with the support of a trusted legal counsel. Our experienced team of lawyers, many of whom are admitted to practice in Latin American countries, can assist you as you consider issuing digital assets (including tokens and coins) in the U.S. or to U.S. persons.
Please get in touch if you would like to learn how we can support you!