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Regulation

Hester Peirce: tokens sold for use in a functioning network are not securities

February 11, 2019, 3:13AM EDT

Hester Peirce, one of five commissioners on the Securities and Exchange Commission (SEC), spoke Friday about what she believes is the optimal level of regulation while fostering innovation and entrepreneurship.

Pierce reiterated that the SEC applies existing securities laws to any token sales or ICOs, which means that they must be conducted in accordance with the securities laws or under an exemption. She said that "many of these projects begin in a centralized manner that looks about the same as any other start-up." Pierce said, however, that when the tokens are not being sold as investment contracts, they are not securities at all. She said that "tokens [that are] sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities."

Bill Hinman, SEC’s Director of Corporation Finance, noted in his speech in June that it is the nature of the transaction that determines whether an offering of securities has occurred, not the item being sold. The Division of Corporation Finance looks to the nature of a token sale to determine whether a securities offering has occurred, and not just at the qualities of the token itself. Hinman noted that a token sold in a securities offering might later be sold in a transaction that does not constitute a securities offering once “a network becomes truly decentralized". 

When looking at these statements by Peirce and Hinman, it is important to keep in mind that these views are their own and do not necessarily represent those of the SEC.