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Speaking today at the SEC Fintech Forum 2019, SEC Director of Corporation Finance William Hinman doubled down on previous statements that ICO-funded projects can become exempt from securities law if they become decentralized enough.
Hinman said during a speech last June that he believed Ethereum is no longer a security—despite running an ICO—because the network is decentralized to a high level. Now, he has suggested that this applies to other ICOs, focusing on the TurnKey Jet example.
TurnKey Jet was the first ICO to be issued a no-action letter by the SEC. This means the SEC does not deem the sale of TurnKey Jet tokens to be in violation of securities law. While it appears to be an obvious no-action case—the TurnKey network is already established and the token cannot be sold on secondary markets or stored on external wallets—this doesn’t have to be the case.
Hinman said we can look at the TurnKey example in another way.
He asked what would have happened if TurnKey had come to the SEC three years earlier, before its network was fully decentralized. At that point in time, he reasoned, it would have been deemed a security. But, as shown by the no-action letter, it is not a security right now.
This, it might be argued, gives rise to the idea that ICO issuers who raised funds over the last couple years need not fear the wrath of the SEC, as long as they can show their network now meets the decentralization standard. Perhaps this will become the “TurnKey test” in opposition to the “Howey test”—which determines if an asset is a security.
It is worth noting that Hinman’s views do not necessarily represent those of the SEC.
This could apply in the case of Kin, a cryptocurrency backed by messaging platform Kik. Recently, Kik CEO Ted Livingston stood up to the SEC, insisting that the coin is not a security—even though it was issued by an ICO—and vowing to fight any enforcement action from the Commission that comes his way. However, the company would have to show that Kik is no longer controlling the coin, which appears to still be the case.
In December, Alex Frenkel, vice president of product at the Kin Ecosystem, told Decrypt that the Kin Foundation still holds a large percentage of Kin and is still very much in control. He said the plan is to move towards a DAO-based governance system but that it hasn’t been built yet. So, it looks like it still might not pass Hinman’s “TurnKey test.”
Kik recently created an alliance and warchest called “Defend Crypto” to battle against the SEC deeming ICOs as securities. But for many other coins, as long as they can pass the “TurnKey Test,” they might be sitting pretty.