April 14, 2021

SEC Commissioner Hester Peirce Offers Update to Proposed Safe Harbor for Digital Tokens

Steven Lofchie Commentary by Steven Lofchie

SEC Commissioner Hester M. Peirce proposed an updated version of her proposal for a three-year safe harbor from the application of securities laws, aside from anti-fraud requirements, on the sale and trading of digital tokens.

As previously covered, Ms. Peirce proposed the following conditions for a token to benefit from the exemption:

  • the token does not represent a financial interest in an entity or any right to receive any ownership interest or the right to receive any financial return, whether in the form of a share of profits or revenue, or an interest-related return; and

  • at the end of a three-year period, the network on which the token is transferred has reached "Network Maturity," meaning that the token or the network on which it is used or traded is either:

    • "decentralized," meaning that it is not controlled and is unlikely to be controlled by any single person or by a group under common controls; or

    • "functional," as demonstrated by the ability of token holders to use the tokens on the network.

Ms. Peirce modified the safe harbor after receiving feedback from the cryptocurrency community, securities lawyers and the public to include:

  • a requirement for issuers to provide semi-annual updates to the plan of development disclosure and a block explorer;

  • a requirement to provide an exit report including either (i) an outside counsel analysis explaining why the network is decentralized or functional or (ii) an announcement that the issuer will register the tokens under the Exchange Act; and

  • guidance under the exit report requirement explaining what the outside counsel's analysis should discuss when explaining why the network is decentralized.

Ms. Peirce encouraged the public to provide feedback on the updated proposal.


How to regulate a digital asset that has both a functional "use" and that may increase in monetary value is a difficult question. Commissioner Peirce is grappling with the difficult regulatory situation in which a purchaser of the digital asset may be buying it for its functional use (in which case the asset is not being purchased as a "security") or may be buying it with the hope of making a profit (in which case that same asset might be a "security").

Individuals and companies who are interested in trying to find a process for dealing with this question should reach out to Commissioner Peirce with comments on her proposal and support her efforts.

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