1. The SEC published a framework for determining whether digital assets constitute "investment contracts" and are therefore securities. 2. The framework analyzes digital assets using the Howey test, which defines an investment contract as an investment of money in a common enterprise with an expectation of profits from the efforts of others. 3. The framework provides guidance on analyzing the three prongs of the Howey test - the investment of money, common enterprise, and expectation of profits from the efforts of others - as applied to digital assets. It examines factors that increase or decrease the likelihood that a digital asset is deemed a security.

1. PRE S E N TE D BY PE TE R HATZ IP E TROS , ES Q
Breaking Down the SEC’s
Framework For “Investment Contract”
Analysis for Digital Assets

2. I N T R O T O T H E “ F R A M E W O R K ”
On April 3, 2019, the U.S. Securities and Exchange Commission subdivision, the Strategic Hub for Innovation
and Financial Technology (“FinHub”) recently published a long-awaited framework for what may or may not
constitute an “Investment Contract” within a securities context, as it pertains to the offering and selling of digital
assets.
The purpose of this framework is provide a guideline for issuers of an ICO, STO, IEO, or other token generation
event, to better understand that “ rubric” utilized by the SEC in determining whether or not a particular TGE is
offering and/or selling a digital asset that is falls within the SEC’s definition of a securities transactions.
As explained below, under the infamous Howey test, an "investment contract" exists when there is the investment of
money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
Whether a particular digital asset at the time of its offer or sale satisfies the Howey test depends on the specific
facts and circumstances.

3. Holding or storing#5
Marketing or promoting #2
The information contained in this framework is
designed to apply to entities engaging in the
following activities related to digital assets:
TO WHOM DOES THE
FRAMEWORK APPLY?
A P P L I C A T I O N
Offering, selling, or distributing#1
Buying, selling, or trading#3
Facilitating exchanges #4
Offering financial services such as
management or advice #6

4. THE MAJOR
EXAMPLES
W H A T A R E S E C U R I T I E S ?
STOCKS
BONDS
TRANSFERRABLE
SHARES
INVESTMENT CONTRACTS

5. in a “common enterprise” #2The 1946 landmark U.S. Supreme Court decision in SEC v. W.J.
Howey Co. has been the long standing precedent used by
subsequent case law decisions in determiningwhether or not a
particular issuance constitutes the security categorized as an
"investment contract.”
Under the Howey test, an “investment contract” exists when:
WHAT ARE INVESTMENT
CONTRACTS?
I N V E S T M E N T C O N T R A C T S
There is an “investment of money”#1
With a reasonable expectation of
profits to be derived from the efforts of
others.
#3

6. I M P O R T A N T N O T E
“The focus of the Howey analysis is not only on the form and terms of the instrument itself (in this case, the digital asset) but also
on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold (which includes
secondary market sales).
Therefore, issuers and other persons and entities engaged in the marketing, offer, sale, resale, or distribution of any digital asset
will need to analyze the relevant transactions to determine if the federal securities laws apply.
The federal securities laws require all offers and sales of securities,including those involving a digital asset, to either be
registered under its provisions or to qualify for an exemption from registration.”

7. This prong of the Howey test is relatively straight forward, as it requires that their be an “investment of money” during an offer and sale of a digital asset through a
token generation event. This prong is often easily satisfied because the digital asset offered during the event is more often than not purchased, or otherwise
acquired, in exchange for value, whether in the form of traditional fiat currency (USD, Euro, etc.), cryptocurrency (BTC or ETH), or other type of consideration.
It is important to remember that this was not always the case. It was not until the SEC’s DAO Report in 2017 when the definition of ”money” under the Howey test
was expanded to include digital assets or other store value.
This definition was further expanded in the August 2018 statement released during the In Re Tomahawk Exploration LLC case which held that air-dropped tokens
issued through a bounty-program constituted an offer and sale of securities because the issuer provided tokens to investors in exchange for services designed to
advance the issuer's economic interests and foster a trading market for its securities.
INVESTMENT OF MONEY
P R O N G N U M B E R O N E :

8. In the DAO Report, the SEC held that a “common enterprise” is established when token holders of a TGE are not provided with meaningful control over the
enterprise, specifically when:
1. Token holders’ ability to “vote” or otherwise make decisions within the functionality context of the enterprise is largely perfunctory or nominal; and
2. Token holders are widely dispersed and limited in their ability to communicate with one another.
The Framework goes on to say that in order to satisfy the "common enterprise" aspect of the Howey test, federal courts require that there be either "horizontal
commonality" or "vertical commonality.” (NOTE: The SEC has said that investmentsin digital assets constitute investmentsin a “common enterprise” because
the fortunes of digital asset purchasers have been linked to each other or to the success of the promoter's efforts.)
1. Horizontal Commonality. Relatively straightforward. Horizontal commonality simply requires investor assets to be joined with others where each
investor shares the risk of loss and profits according to their investment.
2. Vertical commonalty. Vertical commonality focuses on the vertical relationship between the investor and the issuer. Under this test, a common
enterprise exists where the investor is dependent on the promoter’s efforts or expertise for investment returns.
COMMON ENTERPRISE
P R O N G N U M B E R T W O :

9. REASONABLE EXPECTATION OF PROFITS TO BE DERIVED FROM THE
EFFORTS OF OTHERS
P R O N G N U M B E R T H R E E :
This third and final prong of the Howey test, often warranting the most in-depth of analyses, the framework analyzes when the requirement that a
“reasonable expectation of profits derived from efforts of others” is satisfied. The analysis suggests that this is often the case when an investor
participates in a TGE with the reasonable expectation that their investment will yield a profit (or other economically beneficial return) derived from
the efforts of others.
This third prong thus requires a two-part breakdown:
1. An investor/purchaser’s reasonable expectation of profits; and
2. Whether or not the purchaser/investor’s reasonably expectation of profits is contingent upon their reliance on the efforts of an Active
Participant to determine the failure or success of the enterprise.
“Active Participant” (AP) can be the issuer of a token generation event, or any person(s) or entity who curates, sponsors, or otherwise promotes
the issuance of a digital asset— including the digital asset itself.

10. Part 1: “Reasonable Expectation of Profits”
P R O N G N U M B E R T H R E E :
According to the FinHub framework, there is an increased likelihood that an investor reasonably
expects a profit upon the presence of the following factors:
• The digital asset gives the holder rights to share in the enterprise's income or profits or to
realize gain from capital appreciation of the digital asset (i.e. cases where the digital asset gives the holder
rights to dividends, distributions, or passive income).
• The digital asset is transferable or traded on or through a secondary market or platform, or
is expected to be in the future.
• The digital asset is offered broadly to potential purchasers, rather than being targeted to a
more defined and expected userbase of the goods or services, or those who have a need
for the functionality of the network.
• The AP has raised an amount of funds in excess of what may be needed to establish a
functional network or digital asset.

11. Part 1: “Reasonable Expectation of Profits” continued
P R O N G N U M B E R T H R E E :
• The digital asset is marketed, directly or indirectly, using any of the following:
o The expertise/reputation of an AP or its ability to build or grow the value of the network or digital asset.
o The digital asset is marketed in terms that indicate it is an “investment” or that the solicited holders are “investors.”
o The intended use of the proceeds from the sale of the digital asset is to further develop the network or digital asset.
o The future (not present) functionalityof the network or digital asset, and the prospect that an AP will deliver that functionality.
o The promise (express or implied) to build a business or operation as opposed to delivering currently available goods or services for use on
an existing network.
o The ready transferability of the digital asset is a key selling feature.
o The potential profitability of the operations of the network, or the potential appreciation in the value of the digital asset, is emphasized in
marketing or other promotional materials.
o The availability of a market for the trading of the digital asset, particularly where the AP implicitlyor explicitly promises to create or otherwise
support a trading market for the digital asset.

12. Part 2: “Reliance on the Efforts of Others”
P R O N G N U M B E R T H R E E :
According to the FinHub framework, there is an increased likelihood that an investor that a
purchaser of a digital asset is relying on the "efforts of others” when:
• An AP is responsible for the development, improvement/enhancement, operation, or
promotion of the network, particularly, if purchasers of the digital asset expect an AP to be
performing or overseeing tasks that are necessary for the network or digital asset to achieve
or retain its intended purpose or functionality.
• There are essential tasks or responsibilities performed, and expected to be performed,
through centralized efforts of an AP, rather than those of a decentralized network.
• An AP creates or supports a market for the digital asset, or the AP creates/supports the
price of the digital asset.
o (i.e. any AP that either: (1) controls the creation and issuance of the digital asset; or (2) takes other actions to support a market
price of the digital asset, such as fixation of circulation cap through buybacks or coin-burns.)
• The AP has a more centralized role pertaining to decision-making matters concerning
ongoing development, governance issues, source-code updates, and transaction
verification.

13. Part 2: “Reliance on the Efforts of Others” continued
P R O N G N U M B E R T H R E E :
• An AP has a continuing managerial role in making decisions about, or exercising judgment
concerning, the network or the characteristics or rights the digital asset represents. For
example:
o Determiningwhether or not to compensate, and how much, those providing services to the network.
o Determininghow and where the digital asset will trade (if at all) (i.e. purchasers may reasonably rely on an AP for liquidity upon the
promise for secondary market trading on a particular exchange or trading platform).
o Determiningwho will receive additional digital assets and under what conditions.
o Making or contributing to manageriallevel business decisions, such as how to deploy funds raised from sales of the digital asset.
o Playing a leading role in the validation or confirmation of transactions on the network, or in some other way having responsibility for the
ongoing security of the network.
• Purchasers would reasonably expect the AP to undertake efforts to promote its own
interests and enhance the value of the network or digital asset.
o (i.e. the AP internally distributes the digital asset as compensation, or the AP's compensation is tied to the price of the digital
asset in the secondary market).

14. Part 2: “Reliance on the Efforts of Others” continued
P R O N G N U M B E R T H R E E :
Reevaluation of Securities Status
We often see situations where a digital asset, previously sold/offered by an Active Participant in
a way that fell under the Commission’s definition of a ”security,” is later sold/offered under
circumstances which may no longer fall under the purview of the SEC.
Per the framework offered by the Commission, in evaluating whether a digital asset previously
sold as a security should be reevaluated at the time of later offers or sales, there would be
additional considerations as they relate to the "efforts of others," including but not limited to:
o Whether or not the efforts of an AP, including any successor AP, continue to be important to the value of an investment in the digital asset.
o Whether the network on which the digital asset is to function operates in such a manner that purchasers would no longer reasonably expect
an AP to carry out essential managerial or entrepreneurial efforts.
o whether the efforts of an AP are no longer affecting the enterprise's success.

15. MITIGATING FACTORS OF BEING
TARGETED BY “HOWEY”
A V O I D I N G H O W E Y
Immediacy of
token use
Development
stage and
progress of the
digital asset
offered
Focus on
functionality, not
future value
Proper
disclaimers and
extensive digital-
asset materials.

16. GOOD PRACTICES
A V O I D I N G “ H O W E Y ”
Although no one of the following characteristics are determinative or guaranteed to exclude a
digital asset from being scrutinized as a security by the SEC, a digital asset is less likely to be
determined as an “investment contract” under the Howey test upon the presence of the
following:
• The distributed ledger network and digital asset are fully developed and operational upon, or during, the time of the offering.
• Holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to
encourage such use.
• The digital assets' creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or
future development of its network.
• Prospects for appreciation in the value of the digital asset are limited.
o (i.e. the digital asset is designed in such a way that its value will remain constant or even degrade over time— thus preventing a
reasonable purchaser from expecting to incur yield economic gains by holding the digital asset for extended periods as an investment).
• If the digital asset is offered as a “cryptocurrency,” be sure it can immediately be used to make payments in a wide variety of contexts, or acts as a
substitute for traditional fiat currency.
o (i.e. the digital asset can be used for paying for goods or services without first needing to be converted it to another digital asset or fiat
currency, or If offered as a virtual currency, be sure the the digital asset actually maintains "store of value” properties that can be saved,
retrieved, and exchanged for something of value at a later time).

17. GOOD PRACTICES CONTINUED
A V O I D I N G “ H O W E Y ”
• If the digital asset is issued to represent certain rights to a good or service, ensure that it currently can be redeemed within a developed network or
platform to acquire or otherwise use those goods or services outlined. Relevant factors may include:
o There is a correlation between the purchase price of the digital asset and a market price of the particular good or service for which it may be
redeemed or exchanged.
o The digital asset is available in increments that correlate with a consumptive intent versus an investment or speculative purpose.
o An intent to consume the digital asset may also be more evident if the good or service underlying the digital asset can only be acquired, or more
efficiently acquired, through the use of the digital asset on the network.
• Any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended
functionality.
• The digital asset is marketed in a manner that emphasizesthe functionality of the digital asset, and not the potential for the increase in market value of
the digital asset.
• Potential purchasers have the ability to use the network and use (or have used) the digital asset for its intended functionality.
• Restrictions on the transferability of the digital asset are consistent with the asset's use and not facilitating a speculative market.
• If the AP facilitates the creation of a secondary market, transfers of the digital asset may only be made by and among users of the platform.

18. The materials presentedby PetrosLaw Group PC are provided for conveniencepurposes and do not constitutelegal advice, nor are they designed to be interpretedas such. The informationprovided herein
may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guaranteea similar outcome.
D I S C L O S U R E S
Securities and Exchange Commission. The discussion set forth in the “Framework for ‘Investment Contracts’ Analysis of Digital Assets” above
identifies some of the factors market participants should consider in assessing whether a digital asset is offered or sold as an investment contract
and, therefore, is a security. It also identifies some of the factors to be considered in determining whether and when a digital asset may no longer
be a security. These factors are not intended to be exhaustive in evaluating whether a digital asset is an investment contract or any other type of
security, and no single factor is determinative; rather, we are providing them to assist those engaging in the offer, sale, or distribution of a digital
asset, and their counsel, as they consider these issues. We encourage market participants to seek the advice of securities counsel and engage
with the Staff through www.sec.gov/finhub. This framework represents Staff views and is not a rule, regulation, or statement of the Commission.
The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or
the Commission. It does not constitute legal advice, for which you should consult with your own attorney. It does not modify or replace any
existing applicable laws, regulations, or rules. Market participants are encouraged to review all the materials published on FinHub.

19. PETROS LAW GROUP
A B O U T T H E F I R M
The Petros Law Group is a New York law firm that focuses on commercial implementationof digital asset technologies. The Firm represents global
innovators in blockchain seeking to raise venture capital, integrate blockchain technology through business traditional business infrastructures, and
efficiently bring blockchain products to market.
Petros Law Group provides comprehensive legal representationand ongoing regulatory compliance services to companies seeking to leverage
blockchain technology as they navigate complex and uncertainregulatory landscapes which govern Security Token Offerings, Initial Coin Offerings
and other token generation events which are increasinglyscrutinized by regulators of securities, commodities,money transmission, and data privacy.
We recognize that providing advisory services and guidance in this emerging asset class requirestrong partnerships and affiliations to promote
innovation and adaption through a free-flow of informational exchange. In addition to our partnerships with Polymath and Crypto Launchpad, we have
stablished working relationships with multiple blockchain developers, FinTech firms, and innovators in pursuit of developing, marketing and launching
new tokenized assets.
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