United States: SEC Director Hinman's Remarks Confirm That Ether And Bitcoin Are Not Securities

On June 14, 2018, speaking at the Yahoo Finance All Markets Summit: Crypto event in San Francisco, William Hinman, Director of the SEC's Division of Corporation Finance, made news when he definitively stated that neither bitcoin (BTC) nor ether (ETH) are securities and that offers and sales of these cryptocurrencies are not securities transactions. He also indicated that even though the initial issuance of a digital asset may have represented a securities offering, once the asset is no longer controlled by a central authority or used primarily to purchase goods or services on a functioning network, it may not make sense to regulate the digital asset as a security.

Discussing ether, Hinman emphasized the decentralized structure of the Ethereum Network, which creates and transmits ether tokens amongst its users worldwide and is not controlled or maintained by a central authority. The SEC reached these conclusions after observing that ether does not have a "key third-party actor" making decisions and noting that the SEC does not see the types of "information asymmetries" that might exist with investment contracts that rely upon the efforts of a sponsor or promoter. He added that ether's highly decentralized governance structure and the openness of ether developer conferences reinforces this view. Hinman confirmed that this analysis and conclusion also apply to bitcoin, and provided a series of factors to be used to analyze whether any particular digital asset offering should be considered an "investment contract" under the test outlined in SEC v. W.J. Howey Co.1

Hinman's remarks provide clear criteria for when a digital asset offering may not be an "investment contract" under the Howey test. In contrast to the majority of SEC comments and news releases about cryptoassets over the last year, beginning with the DAO Investigative Report in July 2017,2 Hinman's remarks did not focus on what market participants must not do. Instead, he provided a relatively optimistic summary of the SEC's efforts to encourage financial innovation and capital formation in this space while the agency also maintains its enforcement focus on potentially fraudulent offerings. He also noted that the disclosure regime of the U.S. federal securities laws remains a valuable tool to eliminate significant informational asymmetries between promoters of digital asset offerings and potential investors.

Among our other primary takeaways from the remarks were:

  1. A digital asset that was part of an offering of securities may become, over time, something other than a security. Hinman distinguished the initial funding phase of a project, which could take the form of an exempt offering of securities, from later sales of digital assets that represent currency or otherwise have utility value for a functioning network. This second phase of a digital asset's development would not benefit from regulation as a security if it is sold to be used only to purchase a good or service available through the network on which it was created.
  2. A digital asset will be a security under the Howey test if it was offered as part of an investment contract in which a central enterprise maintains the asset and its network and promotes its value.
  3. When analyzing a digital asset offering as a potential security, the inquiry should primarily focus on (i) how the efforts of others affect the value of the digital asset and (ii) the manner in which the promoters marketed and sold the investment.
  4. Hinman confirmed that the Howey test is essential for the SEC's efforts to regulate the ICO market and that most coins or tokens offered in ICOs should be regulated as securities. He added that a detailed facts and circumstances analysis of the economic realities of any potential securities offering, including ones using a simple agreement for future tokens (SAFT), will be necessary.

Hinman did not explain what specific criteria should be used to determine whether a digital asset is "decentralized" or "not controlled by a central authority," but he did indicate that the SEC is "prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use."

Hinman's published remarks included a non-exhaustive list of factors that should be considered when assessing whether a particular digital asset transaction is a securities offering. The primary consideration under the Howey test, whether a third party drives the expectation of a return, always depends on the facts and circumstances at hand, but Hinman's published speech suggested that promoters and their counsel should also ask questions such as the following:

  1. Is there a person or group whose efforts play a significant role in the development and maintenance of the digital asset and its potential increase in value?
  2. Has this person or group retained a stake in the digital asset and are they motivated to expend efforts to cause an increase in value in the digital asset?
  3. Has the promoter raised more than what is needed to establish a functional network, and will it use those funds to support the value of the tokens or to increase the value of the enterprise?
  4. Are purchasers seeking a return on their investment? Is the instrument marketed and sold to the general public or to potential users of the network at a reasonable market price?
  5. Does application of the federal securities laws make sense? Do informational asymmetries exist between the promoters and purchasers of the digital asset?
  6. Does anyone other than the promoter exercise governance rights or exert influence?

Hinman's published remarks include more comprehensive versions of these questions, as well as a list of illustrative questions to determine whether a network or platform is more like a consumer item than a security, which could serve as the basis for an argument that its coin or token has significant utility value and, therefore, is not a security. These questions are available here.

Members of Ropes & Gray's Cryptocurrency Working Group continue to monitor these and related legal developments on behalf of our clients. If you have any questions regarding the matters discussed in this Alert, please feel free to reach out to the authors or your normal Ropes & Gray contact.


1 328 U.S. 293 (1946).

2 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, SEC Release No. 81207 (July 25, 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions