The token, the coin, all by itself is not a security, U.S. Securities and Exchange Commission (SEC) Director of Corporate Finance William Hinman said in a surprise announcement today.
“If the network on which the token or coin is to function is sufficiently decentralized, and the purchasers no longer have a reasonable expectation that a person or group is going to carry out a central managerial or entrepreneurial efforts, those assets might not represent an investment contract,” Hinman said before adding:
“Moreover, when the efforts of a third party are no longer key in determining the enterprise’s success, material information asymmetry recedes.
What the third party promoters know about, but investors don’t know about, if this is highly decentralized, that information asymmetry recedes.
As the network becomes more truly decentralized, the ability even to identify a promoter, or someone that could make the requisite disclosures, becomes in many cases difficult or perhaps much less meaningful…
Putting aside the fundraising that accompanied the creation of ether, based on my understanding of the present state of ether, the ethereum network, its decentralized structure, we believe current offers and sales of ether are not securities transactions…
Overtime there may be other sufficiently decentralized networks and systems, where regulating the tokens that function on them as securities may not be required.”
SEC has thus clarified that a token can start out as a security and then become something else, with Hinman further stating:
“Can a digital asset originally sold in a securities offering eventually be sold in something other than a security? How about cases when there’s no longer a company? I believe in those cases answer is a qualified yes.”
Just how exactly this would work in practice, however, is unclear. Just when does it stop being a security, for example. How does anyone know or determine? When does the network become decentralized or functional? When does reliance on a central operator stop?
Those questions were unanswered, with Hinman suggesting projects may find it easier to have a formal structure in place initially, build the network, and then launch the token.
So keeping in place the discriminatory Securities Act 1933 which prohibits all but the very rich from investing in highly risky but potentially highly rewarding opportunities that can become world changing.
Leaving open the question of whether a decentralized platform can really operate under significant tokens concentration in the hands of few private rich investors who are given the privilege of first offering.
But at least they have now managed to provide a little bit of clarity, although how exactly these maybe, could, perhaps, translate in practice does very much remain to be seen.