While such comments are not official policy of the SEC, they are a good indicator of it. If a digital asset is determined to be a security, then the issuer must register the security with the SEC or offer it pursuant to an exemption from the registration requirements. For offerings that are being made under a federal exemption from securities registration, the SEC places fewer restrictions on the sale of securities to “accredited investors.” An individual investor is an “accredited investor” only if he or she (i) is a director or executive officer of the company issuing the securities, (ii) has an individual net worth (or joint net worth with a spouse) that exceeds $1 million, excluding the value of the investor’s primary residence, (iii) has an individual income that exceeds $200,000 in each of the two most recent years, and has a reasonable expectation of reaching the same individual income level in the current year, or (iv) has a joint income that exceeds $300,000 in each of the two most recent years, General George Washington and has a reasonable expectation of reaching the same joint income level in the current year.

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Alternatively, Section 3(c)(7) allows a fund to have an unlimited number of investors (but practically it should be limited to 2,000 to avoid being deemed a publicly traded partnership under the Securities Exchange Act) but requires a significantly higher net worth suitability requirement for each investor (roughly $5 million for individuals, $25 million for entities). Until the SEC provides more guidance on classifying individual cryptocurrencies as securities or commodities, the likelihood of many cryptocurrencies being deemed securities is high. As a general rule, most startup funds are structured as 3(c)(1) funds because of the lower investor suitability requirements.

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In September 2022, SEC Chair Gary Gensler indicated in a speech at a Practising Law Institute SEC Speaks event, and again on September 15, 2022 in congressional testimony, that certain crypto intermediaries must register with the SEC. Under the RFIA, the CFTC would have exclusive jurisdiction over a crypto token that qualifies as an ancillary asset but not the “security that constitutes an investment contract.” To qualify as an ancillary asset, the token must not offer the holder any financial rights in a business, such as to debt or equity, liquidation, or interest or dividend payments. In July 2023, an updated version of the RFIA – first introduced in 2022 – attempts to codify a clear regulatory framework for which cryptoassets are securities or commodities. Gensler also offered support for CFTC regulation of “non-security” tokens.

In September 2017, the CFTC announced its first anti-fraud enforcement action involving Bitcoin. In July of 2020, the OCC affirmed in an interpretive letter that national banks and savings associations can provide custody services for cryptocurrency. These anti-fraud actions can be taken by the SEC. The letter noted that banks can also provide related services such as cryptocurrency-fiat exchanges, transaction settlement, trade execution, valuation, tax services and reporting. CFTC regardless of the cryptocurrency fund’s exempt status.

But under certain circumstances, the same asset can be offered and sold in a way that causes investors to have a reasonable expectation of profits based on the efforts of others. For example, if the housing unit is offered with a management contract or other services, it can be a security. Later in the same speech, Mr. Hinman made clear that a digital token that might initially be sold in a transaction, constituting the sale of a security, might thereafter be sold as a non-security where the facts and circumstances have changed over time, such that the Howey test is no longer met, specifically, if the blockchain protocol becomes truly decentralized like Bitcoin and Ethereum; negating the “efforts of others” prong of Howey.