In remarks at the University of Missouri School of Law, SEC Commissioner Hester Peirce described the difficulty in applying securities laws in general, and the Howey test in particular, to virtual currency and initial coin offerings. Ms. Peirce expressed concern that the SEC's application of the Howey test will be "overly broad," stating that token offerings do not always resemble traditional securities offerings. Some cryptocurrency projects may be unable to proceed because they cannot comply with applicable securities regulations, she said. In addition, she encouraged a "delay in drawing clear lines" for the regulation of virtual currency transactions which may provide more freedom for the technology to develop. Ms. Peirce noted that the SEC staff is working on "supplemental guidance" to "help people think through whether their crypto-fundraising efforts fall under the securities laws."
Ms. Peirce stated that regulators tend to be unenthusiastic about innovation, given that it forces unwanted adjustments on them, as well as the possibility of negative consequences that are difficult to predict. The Commissioner said that the SEC must be open to innovation, given its potential to make our "lives easier, more enjoyable and more productive." She raised a number of questions as to regulatory changes that might be considered in light of new technology; changing the ways in which firms communicate with their investors, for example, or revising the SEC's recordkeeping rules.
Ms. Peirce also praised the SEC's new office of "Small Business Capital Formation" and its first Advocate, Martha Miller.
Commentary / Mark Highman
Commissioner Peirce provides a nuanced analysis of the policy considerations relevant to determining how virtual currency transactions should be regulated, including the limitations of the Howey test, whether virtual currency should be treated as a separate asset class with its own regulatory framework, and the extent to which it is appropriate to rely on market forces without the need for regulatory intervention. While there is considerable merit in addressing these policy questions, the SEC (and other regulators) are still applying traditional tests for determining whether virtual currency transactions are subject to existing regulatory regimes. As recent enforcement actions testify, firms that stray beyond these lines are at risk of regulatory sanction.
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