SEC Commissioner Peirce has proposed a three-year safe harbor for qualifying token projects, but regulatory clarity remains elusive.
By Stephen P. Wink, Carolina Bernal, Shaun Musuka, and Deric Behar
SEC Commissioner Hester Peirce has been a perennial advocate of innovation in the financial services and digital asset space. Continuing that tradition, she unveiled a Token Safe Harbor Proposal in a speech at the International Blockchain Congress on February 6, 2020. The proposal would allow for a time-limited exemption for token-based projects that seek to raise capital to develop decentralized networks. The exemption would permit fledgling networks to operate unburdened by the onerous registration provisions of the US federal securities laws.
Provided that certain standards and disclosure requirements were met, the three-year grace period would ostensibly allow token developers to pursue “sufficient” decentralization of their network from the time of first token sale, such that purchasers of the token would no longer reasonably expect that that token value was being driven by a person or group via managerial or entrepreneurial efforts. Sufficient decentralization has become the holy grail of initial coin offerings (ICOs) ever since the SEC’s Strategic Hub for Innovation and Financial Technology released a framework for assessing whether a blockchain-issued token or digital asset constitutes an investment contract (i.e., security) under the Howey test. (See New SEC Token Guidance: This Is Howey Do It and Crypto — The Pursuit of Sufficient Decentralization.)