In an unexpected development, Grayscale, the renowned cryptocurrency asset manager, encountered regulatory headwinds. It came as a voluntary Form 10 request the firm submitted, intending to transform the Filecoin Trust into a reporting entity. Unfortunately, the U.S. Securities and Exchange Commission (SEC) responded, cautioning Grayscale that Filecoin (FIL) tokens may fall under the category of securities.
The SEC’s Warning and Grayscale’s Unintended Consequences
This recent event marks another flashpoint in escalating disputes between cryptocurrency enterprises and the SEC. In the heart of this regulatory drama lies the Filecoin Trust, a creation of Grayscale, which forms part of the wider Digital Currency Group (DCG).
Grayscale’s Form 10 submission for the trust aimed to convert it into an entity that would disclose quarterly results, paralleling the practice of publicly listed companies.
On May 17, a press release confirmed that the SEC advised Grayscale to withdraw its application. Instead, the SEC recommended that Grayscale consider registering as an investment entity, in line with the Investment Company Act of 1940. A shift towards investment company status could impose certain limitations on the Filecoin Trust, potentially impacting its capacity to issue securities.
The Filecoin Trust: An Investment Company in Disguise?
For the Filecoin Trust to qualify as an investment company, it must position itself as an entity primarily engaged in securities investment. That raises a critical question: can FIL pass the Howey Test, the established criterion for determining whether a transaction amounts to an investment contract and hence qualifies as a security?
According to the Howey Test, a transaction is classified as an investment contract if it represents an investment of funds in a shared venture, expecting profits predominantly from others’ efforts. Despite this definition, FIL, utilized as a payment method for Filecoin’s data storage services, has a valid use case. Consequently, this practical usage might exempt FIL from satisfying the Howey Test conditions.
Grayscale’s Pushback Against the SEC’s Ruling
Grayscale’s stance, articulated in the same press release, signals a spirit of resistance. While the firm has expressed its intent to cooperate if it fails to sway the SEC, it contests the notion that FIL is a security under federal laws.
In the firm’s words, “Grayscale does not believe that FIL is a security under federal securities laws and intends to respond promptly to the SEC staff with an explanation of the legal basis for Grayscale’s position.”
The company recognizes the inherent uncertainty of its position: “Grayscale cannot predict whether the SEC staff will be persuaded that Grayscale’s position is correct, and if not, whether it may become necessary for Grayscale to enable the Trust to register under the ICA of 1940 or, alternatively, seek dissolution of the Trust.”
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