A newly introduced bill in the House, known as the Securities Clarity Act, aims to clarify that digital assets sold as part of an “investment contract” will not necessarily be considered a security. If passed, this bill will help resolve one of the most debated legal questions in the crypto space and make it increasingly difficult for the U.S. Securities and Exchange Commission (SEC) to argue that numerous existing tokens are unregistered securities.
Since 2018, the question of “sufficient decentralization” and whether a digital asset could “transform” from a security to a non-security has been a contentious topic following a speech by Bill Hinman, then director of the SEC’s Division of Corporation Finance. SEC Chairman Gary Gensler has repeatedly expressed skepticism about projects’ claims regarding decentralization and has specifically refrained from confirming that the reason he believes Bitcoin is not a security is due to it being “sufficiently decentralized.”
The recently introduced bipartisan Securities Clarity Act, by Representatives Tom Emmer (R-MN) and Darren Soto (D-FL), would create a distinction between an investment contract transaction, which is a securities offering, and the underlying investment contract asset. This implies that a token offered as part of an investment contract would not need to “transform” into a non-security as it wouldn’t be deemed a security in the first place.
Such a distinction is critical because, nowadays, development teams looking to launch a token in the U.S. often raise funds in SEC-compliant securities offerings using Regulation D (Reg D) offerings. The primary question for these projects is not whether a security can “transform” into a non-security, but whether a token can be included in a multi-stage agreement involving a securities offering without itself becoming a security.
Passing the Securities Clarity Act would provide much-needed clarity and offer a path to compliance in the U.S. for crypto projects. The bill would also ease the burden for trading platforms currently struggling to assess if a token that may have initially been offered in a securities transaction can subsequently be listed or made available for trading.
Although the proposed legislation would not outright prevent the SEC from determining that investment contract assets are securities, it would significantly reduce uncertainty for investors and issuers alike. Despite facing an uphill battle in the Senate, this five-page bill would provide clarity with a simple amendment to the definition of a “security” in the federal securities laws.
By introducing the Securities Clarity Act, House Financial Services Committee is taking another step in the right direction. The committee is also poised to pass a bill on payment stablecoins and is rumored to be working on a market structure bill. It is essential to continue monitoring developments in this area to better understand the impact on the future of crypto-regulation in the United States.