SEC Treatment of Digital Assets

Digital assets have remained popular for many different reasons, one of which is their potential to decentralize money and trade. Many digital asset supporters believe that this can reduce the control of big institutions like the SEC, central banks, and governments, which could make for a more democratic financial system.

Blockchain, the technology behind the digital asset industry broadly, is seen as more trustworthy because of its transparency and inability to be easily changed, unlike money that is backed by governments. Another reason digital assets have gained attention is their ability to help individuals all around the world who don’t have access to traditional banking.

With digital assets, users can make transactions, save money, and even get credit with lower fees than banks. As the digital asset market market has grown, regulators like the Securities and Exchange Commission (SEC) have started to pay closer attention.

SEC Enforcement Actions Regarding Digital Assets

Digital assets fall under the SEC’s authority when they meet the Howey Test. This rule comes from a 1946 Supreme Court case, SEC v. W.J. Howey Co., and is used to determine if a financial deal counts as a security. Simply put, the court decided that if someone invests money into a project expecting to make a profit because of the work of others, it’s considered a security, and the SEC can step in.

Regulators are trying to protect investors, keep the markets stable, and bring more transparency to the fast-changing world of digital currencies. Here are some of the reasons why the SEC is becoming more active in enforcing rules around digital assets.

Protects Investors

Protection Against Fraud — Because digital asset markets are relatively new and often linked to fraud and scams, SEC enforcement helps discourage fraud and protects investors from dishonest people.
Improving Transparency — By regulating digital asset markets under securities laws, the SEC hopes to require companies to share more accurate and detailed information with the public. This will help investors make better and more informed decisions.

Market Integrity

Price Manipulation — Because digital asset markets are unregulated and transactions can be anonymous, they’re more vulnerable to manipulative practices that may artificially influence prices. The SEC’s involvement can help reduce these kinds of practices and ensure fair pricing.
Market Surveillance — Monitoring the digital asset markets for suspicious or unusual activities can help protect and maintain market integrity and build investor trust.

Legitimacy and Adoption

Build Trust and Legitimacy — Having digital asset companies under the SEC’s regulations can prove their legitimacy and make them more appealing to traditional investors and institutions. This can help lead to a broader acceptance of digital assets.
Create Innovation and Fair Competition — SEC enforcement can encourage a fairer environment that breeds innovation and competition, which are essential for digital asset’s long-term growth and success.

Clearer Regulation

Establish Boundaries — The SEC’s role can help determine clear boundaries between traditional securities and digital assets, providing clarity for entrepreneurs and investors.
Standards for Compliance — Creating clear rules for compliance can help digital asset companies comply with established regulations and eliminate any legal uncertainties.
Global Collaboration — Since digital assets operate without borders, cooperation between countries and enforcement can effectively address challenges worldwide.

Understanding Howey Test

Howey Test is a legal standard in the U.S. that determines whether a financial deal is considered an investment contract and falls under certain regulations. It plays a significant role in how the SEC evaluates financial arrangements, including digital assets and initial coin offerings (ICOs).

SEC v. W.J. Howey Co. established the criteria for regulating transactions. This case is critical in the digital asset world because it helps determine what rules apply to digital asset ventures.

Howey Test Criteria

Investment of Money — A person or entity must invest something valuable.
Common Enterprise — The investment needs to be a common venture, though courts will differ on what this means.
Profit Expectation — At least one party expects to profit from the deal.
Profits Come From Others’ Effort — The return on investment depends on the work done by others, such as a promoter or third party.

This test is essential when deciding whether digital assets and similar financial products are subject to regulation.

Recent High-Profile Digital Asset Scandal Cases

The digital asset space has had its susceptibility to fraud highlighted by the criminal activity over the years. Here are some notable recent high-profile cases.

In Re Galois Capital Mgmt (September 2024) — The SEC announced that it settled charges against Galois Capital Management LLC, a former Florida-based registered investment adviser, for failing to meet regulations regarding safeguarding client assets, including digital assets being offered and sold as securities.
SEC v. Plutus Lending, LLC d/b/a Abra (August 2024) — The SEC has reached a settlement with Plutus Lending LLC, also known as Abra, for not registering its retail digital asset lending product, Abra Earn. The charges also include operating as an unregistered investment company.
SEC v. Tanner S. Adam, Jonathan L. Adam, Triten Financial Group, LLC, and GCZ Global LLC (August 2024) — The SEC charged brothers Tanner and Jonathan Adam and their alter ego-associated companies with fraudulently handling a securities offering. They allegedly misused investor funds that were supposed to support a digital asset lending pool they claimed that they were managing.
SEC v. NovaTech LTD et al. (August 2024) — The SEC has charged Cynthia and Eddy Petion, and their company NovaTech Ltd., with running a fraudulent scheme that raised more than $650 million in digital assets from more than 200,000 investors globally, including many in the Haitian-American community. Several other individuals, including James Corbett, Corrie Sampson, John Garofano, Martin Zizi, Dapilinu Dunbar, and Marsha Hadley, have also been charged for their role in the promotion of NovaTech to investors.
SEC v. Murray, et al. (May 2024) — The SEC charged Robert Scott Murray and his company, Trillium Capital LLC, for fraud in trying to manipulate Getty Images Holdings Inc.’s stock price. They did so by falsely claiming that Trillium was making an offer to buy Getty Images. Murray previously held a position as a CEO and CFO for several publicly traded companies.
In re Equiniti Trust Company, LLC f/k/a American Stock Transfer & Trust Company, LLC (August 2024) — The SEC settled charges with Equiniti Trust Company LLC, a registered transfer agent based in New York, formerly known as American Stock Transfer & Trust Company LLC. The charges come from the company’s failure to properly protect client securities and funds from theft or misuse.

Turn to the Trusted Advisors at Veritas Global

Maximize your business’ potential with Veritas Global. We provide outsourced general legal counsel for technology companies, private investment funds, portfolio companies, and more. Our cost-effective, strategic solutions ensure you stay on top of legal requirements while achieving a competitive advantage.

Our global expertise allows us to provide tailored legal solutions across borders. From our US headquarters to our extensive network in Asia, we have a global reach. With a personalized approach and knowledge, we can help you navigate venture capital, IPs, M&A, or compliance and achieve your business goals.