In OC Lawyer Magazine, Partner Hailey Lennon and Associate Ivan Chaykovskiy Examine Challenges of Crypto Regulation

Partner Hailey Lennon and Associate Ivan Chaykovskiy co-authored an article published in the February issue of the Orange County Lawyer entitled “The Howey Test and the Challenges of Cryptocurrency Regulation.”

In the article, the authors examine the challenges that exist in navigating the developing cryptocurrency universe and regulatory landscape, including the U.S. Securities and Exchange Commission.

“In recent years, the SEC’s enforcement activity has been aggressive and the SEC’s involvement in and commentary on the industry remains ongoing,” they wrote. “In February 2020, SEC Commissioner Hester Peirce proposed a three-year safe harbor to allow projects to work toward the level of decentralization required to pass the Howey Test, while not being subject to enforcement actions during the process.”

The Howey Test refers to SEC v. W. J. Howey Co., which defines an “investment contract” as a securities instrument within the scope of the Securities Act of 1933. It set forth a test for determining whether transactions are investment contracts and if they’re subject to securities registration requirements. A transaction is an investment contract under the Howey test if it includes each of the following elements: (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) derived from the efforts of others.

“The Howey Test remains a cornerstone of SEC enforcement activities. Beyond enforcement actions, the SEC has issued a number of policy statements, including its ‘Framework for Investment Contract’ Analysis of Digital Assets,” they wrote. “This document turned the four-pronged Howey Test into dozens of factors that cryptocurrency companies now need to consider before issuing or listing a cryptocurrency. It’s a matter of some controversy as to whether this created more or less clarity.”

Read the full article here.