SEC Commissioner Proposes a Three-Year Safe Harbor Period For Token Sales

The U.S. Securities and Exchange Commissioner, Hester Peirce, has come up with a proposal to allow legitimate and properly developed crypto projects a chance to make it, without breaking the law.

Peirce recommends allowing startups a three-year safe harbor period from their first token sale to grow and achieve certain degree of independence, decentralization, and maturity before they can pass SEC’s rules and regulations.

The SEC published a transcript of her speech “Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization” on its website.

“The SEC has tried to apply the Howey analysis to crypto, but doing so is not particularly easy,” said Peirce, referring to a case which reached the Supreme Court – SEC v. W.J. Howey Co. Stemming from this court case is a “Howey test”, which determines whether a transaction represents an investment contract or not.

“The SEC’s approach in these cases has made it extremely difficult for a company to distribute a token—a process that typically includes planning for a future in which people use the network and talking positively about its prospects for success—without running into a charge that the company is engaged in a securities offering,” said Peirce.

Furthermore, she added that applying the Howey case to crypto “is not particularly easy”. To avoid challenges and difficulties, Peirce recommends an introduction of a safe harbor period of three years “designed to protect token purchasers by requiring disclosures tailored to the needs of the purchasers and preserving the application of the anti-fraud provisions of the federal securities laws”.

More specifically, she outlines a need for the “initial development team” that will manage the startup and aim to develop the product to a certain degree to reach “network maturity” within three years from the date of the first token sale.

“The definition of Network Maturity is intended to provide clarity as to when a token transaction should no longer be considered a security transaction but, as always, the analysis will require an evaluation of the particular facts and circumstances,” she states in the proposal.

This is not the first time Peirce has mentioned the idea of a safe harbor for crypto startups. She floated around this idea before, however, it is believed that this is the first time that the idea has been formalised.