The U.S. Securities and Exchange Commission (SEC) has spoken: Bitcoin is not a security. The clarification came in the form of a decision letter denying the establishment of a Bitcoin-based investment fund.
Everyone invested in the cryptocurrency market should take two minutes to read about the situation since it will impact near-future industry developments.
SEC Denied Bitcoin-Based Cipher Investment Fund Status
Cipher Technologies Bitcoin Fund applied to become an investment company and closed-end interval fund.
Closed-end interval funds don’t trade stocks on the secondary market; instead, the fund periodically buys back shares. These types of investment vehicles are usually characterized by high fees, high yields, and high illiquidity.
In its proposal, the company argued that its offerings complied with standards defined in the Investment Company Act.
The SEC, however, did not agree. In a letter outlining its Cipher verdict, the commission said:
“We think [your] conclusion is incorrect under both the reasoning of SEC v. Howey and the framework that the staff applies in analyzing digital assets. Among other things, we do not believe that current purchasers of bitcoin are relying on the essential managerial and entrepreneurial efforts of others to produce a profit. Accordingly, because Cipher intends to invest substantially all of its assets in bitcoin as currently structured, it does not meet the definition of an ‘investment company’ under the Investment Company Act, and it has inappropriately filed on Form N-2.”
The Securities and Exchange Commission also argued that if Bitcoin qualified as a “publicly-offered security,” then, by definition, Cipher would automatically become an underwriter of Bitcoin, which ultimately undermines its argument.
Howey: The Cryptocurrency Security Test
The SEC’s Cipher ruling isn’t a regulation, but it does provide helpful guidance. Moreover, even though the decision isn’t codified law, attorneys can use it as a reference when drafting opinions and arguments.
The letter also clarifies a foundational crypto legal tenant: The SEC faithfully employs the Howey Test to determine if ICOs or token investment offerings meet the financial security bar.
What’s the Howey Test?
Derived from a 1940s Supreme Court case, Howey delimits the financial security framework as:
- An investment;
- In a common enterprise;
- With the expectation of profit;
- That derives from third-party efforts.
Contact a Cryptocurrency Lawyer
Gordon Law Group works with blockchain firms seeking investment company status with the SEC. We also consult on matters ranging from tax strategies to offshore investing.