The VC's have apparently moved in to save the day. (Or themselves.)
Both the WSJ
have reported that a number of top-flight investors and crypto law firms met privately with the SEC last month to discuss token regulation.
The “Venture Capital Working Group”, a self-organized squad that included Andreessen Horowitz, Union Square Ventures, and law firms Cooley, Perkins Coie, and McDermott Will & Emery, headed to Washington D.C. last month for a private meeting with the SEC’s Division of Corporate Finance. The group proposed the creation of a “safe harbor” provision for some virtual currencies, and argued digital tokens should generally be exempt from securities laws if they achieve “full decentralization” or “full functionality.” The regulators apparently expressed skepticism about granting such a broad exemption and even indicated they were still considering whether virtual currencies like Ether should be categorized as a security.
I still don’t get how the law works.
Right now, there's a test the SEC uses to determine whether something is a security. The "Howey Test" arose from a 1946 Supreme Court case SEC v. W.J. Howey Co.
, which laid out a four-pronged rubric for assessing whether something could be classified as a security. Specifically, “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.”
Okay, what are the possible scenarios going forward?
+ The good news is that the SEC cannot extend its authority beyond the confines of the Howey Test. It can classify a token as a security, or it can leave it alone, but it can't create a new category or regulatory framework. The SEC does
have the administrative authority to adopt a "safe harbor" provision, though, a specific interpretation of the Howey Test that carves out token projects that abide by certain standards. Projects that effectively proved they were not mere speculative tools whose appreciation relies on the "efforts of others" (i.e. the issuers) could find safe ground. Unfortunately, safe harbors generally can't be applied retroactively. But this would be better than the alternative...
+ The nightmare scenario would be a categorical classification from the SEC that all tokens are, in fact, securities. This would mean any token sales that had not been sold in compliance with U.S. securities law (i.e. registering with the SEC or qualifying for and relying on one of the exemptions provided) could be on the wrong side of the SEC. This could lead to civil offense charges, and likely result in wholesale dissolution and "rescission" where projects would need to refund their investors and face substantial monetary penalties.
What does this all mean?
If you're a token issuer that did an ICO without consulting a securities lawyer or following existing securities laws, you should be worried, which is why your investors and lawyers went to DC.
Before you panic, two reminders: first, the SEC is seriously debating the definition of security as it applies to all
cryptoassets--including ETH--which makes the sheer scale of a crackdown daunting to pursue in practice; second, any actual changes in the law would have to come from Congress (or legal precedent stemming from new court proceedings), not the regulators themselves. That will probably take quite a while. Hence the attractiveness of a "safe harbor" provision that mirrors similar efforts in the late 90s internet
A safe harbor would keep the good times and innovation rolling while still providing the SEC the flexibility to pursue bad actors with shitty exit scams, and keep a close eye on the form of poorly managed sales that enrich professional investors at the expense of Joe Sixpack.
You don’t need to be anti-government to support crypto
. But TBD whether anyone in DC cares.
(h/t to Katherine Wu for the help on this one. Any corrections were hers. Any errors mine.)