The memo argues that while certain digital tokens sold to select investors before wider availability may qualify as securities, they should be granted protection from regulations once they are used for a non-investment purpose. | AP Photo Venture capital firms seek regulatory shelter for digital token startups

A group of venture capital firms with investments in digital currency-related companies has asked the SEC for a safe harbor from securities laws for certain projects.

The request came via a 49-page memo sent to senior SEC staff March 26 by the law firm Perkins Coie, which represents different stakeholders. The memo argues that while certain digital tokens sold to select investors before wider availability may qualify as securities, they should be granted protection from regulations once they are used for a non-investment purpose.


Venture capital firms Andreessen Horowitz and Union Square Ventures drove the initiative, according to several people with knowledge of the proposal who were not authorized to speak with the media. It’s unclear if other firms also joined.

According to sources familiar with the effort, the law firms Cooley LLP and McDermott Will & Emery are also involved in the effort.

A separate document for an informal venture capital working group on the subject outlines the strategy for a safe harbor for certain digital currency projects, to allow for a more flexible regulatory framework. The working group alternatively proposes working with the SEC to obtain “no-action letters“ that prevent certain legal actions, provided companies comply with regulatory guidance.

“To remedy the uncertainty and confusion in this space, we are proposing a non-exclusive safe harbor to help provide guidance to the industry on what constitutes an ‘investment contract’ and how the investment contract law and guidance should apply to utility tokens,” the working group document states.

Under the terms of the safe harbor, digital currencies would not be subject to securities law, including the so-called Howey test, once they achieve certain benchmarks centered on blockchain software functions. Pre-sales of tokens would continue to fall under securities law.

“Once the token achieves full functionality, offers and sales of tokens would generally not constitute investment contracts under Howey,” the most prominent Supreme Court case for determining whether an asset legally qualifies as a security.

The industry argument highlights the unusual regulatory questions around the burgeoning initial coin offering sector, which combines capital formation for often unproven startups with blockchain software that requires a token for proper use.

Initial coin offerings raised billions of dollars for startups in 2017, but industry remains concerned over the complicated regulatory landscape for most companies that used the new approach to fundraising. On top of federal and state securities law, money transmission statutes may also apply to digital currency companies.

The venture capital firms and the lead lawyer for Perkins Coie’s Blockchain Technology & Digital Currency industry group either declined to comment or did not immediately respond.

Coin Center, a policy nonprofit focused on digital currency issues that receives financial support from Andreessen Horowitz and Union Square Ventures, also declined to comment.

The SEC also wouldn’t comment but referred to prior statements by Chairman Jay Clayton and other agency officials on initial coin offerings.

Clayton testified before Congress in February that he had yet to see an ICO that was not an unregistered securities offering, and the SEC has placed priority on alleged fraud or other potential legal violations in this area.

However, in remarks at Princeton University earlier this month, Clayton appeared to signal an openness to a fluid legal definition for digital tokens.

According to CoinDesk, a digital currency-focused publication, Clayton compared digital tokens to laundry tokens. If he used a laundry token to wash clothes, Clayton reportedly said, then it’s not a security. But if he offered laundry tokens for purchase at a laundromat yet to be built that can be resold at a different price, then that would qualify as a security, he said.

"What we find in the regulatory world [is that] the use of a laundry token evolves over time," Clayton reportedly said. "The use can evolve toward or away from a security."

The venture capital working group for digital currencies argues that the digital currency ether qualifies as an asset that evolved away from being a security.

“[Ether] is a good example of this type of protocol token that has become so decentralized it should not be deemed a Security,” the document asserts. Though many digital currencies run off code related to the Ethereum network that uses ether, the working group does not believe the safe harbor would necessarily apply to those tokens.

Ether was launched to support decentralized computer projects like self-executing legal contracts written in computer code, and has exploded in value over the last year and a half. Much of the more recent initial coin offering or digital token creation activity has been inspired by Ethereum’s launch.

Brian Knight, director of the Program on Financial Regulation for the Mercatus Center, said he thought the industry engagement made sense after it was described to him by a reporter.

“Engaging with the SEC in a professional way, making arguments grounded in the current law as it stands, is a smart approach,” said Knight. “This strikes me as more of a professionalization of the ICO industry, to come in and acknowledge that they are subject to U.S. law.”