Digital asset bill moving through California's legislature would limit which are deemed securities

Legislation is moving through the California Assembly – the state legislature's lower chamber – that would create conditions under which certain types of digital assets wouldn't be considered securities.

The legislation was filed by Assemblymember Ian Calderon, who is the chamber's Majority Leader, back in February, and earlier this week was re-referred to committee with amendments.

Calderon previously authored legislation – later signed into law in 2018 – that created a state definition for "blockchain technology" and created a working group focused on the benefits and risks of its use for both businesses as well as the state government. 

Now, Calderon – who is not seeking reelection to his seat – is pushing to carve out new space for digital asset activity within the state, according to the text of the legislation. As the bill explains:

"Existing law, the Corporate Securities Law of 1968, provides for the regulation of the issuance of corporate securities, requires the qualification of an offer or sale of securities, and provides for exemptions from qualification with the Commissioner of Business Oversight. Existing law defines a "security" to mean a note, stock, and, among other things, an investment contract. This bill would create an exception from the above definition by providing that a digital asset meeting specified criteria is presumptively not an investment contract within the meaning of a "security." The bill would allow that presumption to be rebutted upon good cause shown by clear and convincing evidence by the Commissioner of Business Oversight, as specified."

Those criteria are:

• "The asset is not acquired by the holder in exchange for the payment of fiat currency or another digital asset."
• "The asset is used on a fully operational network and the purpose of the asset is for a consumptive purpose, such as the access or consumption of goods, services, data, or the performance of useful functions other than as a medium of exchange or store of value."
• "The asset does not rely on the managerial efforts of others for its success, with the lack of managerial efforts of others evidenced by the absence of any identifiable person, project team, or management entity that is responsible for the development, improvement, oversight, or promotion of the asset or the related network, and either:
  • Any changes to the software code underlying that asset may be made by network participants.
  • Voting rights over the functioning of the network are conferred to each holder of the asset.
  • Viatical settlement contract or a fractionalized or pooled interest therein.
  • Voting trust certificate.
  • Certificate of deposit for a security.
  • Interest in a limited liability company and any class or series of those interests (including any fractional or other interest in that interest), except a membership interest in a limited liability company in which the person claiming this exception can prove that all of the members are actively engaged in the management of the limited liability company; provided that evidence that members vote or have the right to vote, or the right to information concerning the business and affairs of the limited liability company, or the right to participate in management, shall not establish, without more, that all members are actively engaged in the management of the limited liability company.
  • Certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under that title or lease.
  • Put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof).
  • Put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency.
  • Any beneficial interest or other security issued in connection with a funded employees' pension, profit sharing, stock bonus, or similar benefit plan.
  • In general, any interest or instrument commonly known as a "security."
  • Any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
  • All of the foregoing are securities whether or not evidenced by a written document."

As stated earlier in the bill's text, the stated presumption is conditional on a lack of concerted action by the Commissioner of Business Oversight. However, if approved, the bill would place California among the ranks of other U.S. states that have sought to clarify their rules around digital assets, including Wyoming.