The new year has started with important developments in the digital asset landscape, as the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) take action towards integrating digital assets and digital asset-backed systems into the traditional market infrastructures. Below is a brief summary of these recent actions and their potential implications for participants in the digital asset market.
SEC No-Action Letter for Tokenized Rewards Program
On January 12, Megatel Homes, LLC (Megatel), one of the largest privately held real estate developers, submitted a no-action request to the SEC’s Division of Corporation Finance (Corp Fin) requesting that Corp Fin not take enforcement action with respect to the offering by MegPrime Holding LLC (MegPrime), a new holding company, of a tokenized rewards program targeted at addressing affordability needs of the company’s users by providing digital tokens and points that represent the dollars spent on 1-to-1 basis with the digital tokens, in the event the users spend tokens with a merchant in a commercial transaction (Rewards Program).
The no-action request analyzes the tokens granted in the Rewards Program by MegPrime under the Howey “investment contract” test to determine whether the tokens are considered a “security” under Section 2(a)(1) of the Securities Act of 1933 (Securities Act) or Section 3(a)(10) of the Securities Exchange Act of 1934 (Exchange Act). The Howey test requires an assessment of whether there is:
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an investment of money;
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in a common enterprise;
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with a reasonable expectation of profits;
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derived from the efforts of others.
If any element or prong of the Howey test is not satisfied, then the tokens do not constitute an investment contract or a security under the Securities Act and Exchange Act.
Megatel argued that the tokens granted by the company “represent a right or interest to receive consumption rewards offered by MegPrime Holding LLC based on the dollar of amount of tokens a user spends, similar to how credit card rewards and points are created and used” and does not create a reasonable expectation of profits derived from the efforts of others — a required prong under the Howey test. Accordingly, the tokens cannot be considered an investment contract or a security under the Securities Act and Exchange Act.
In response, CorpFin granted no-action relief on January 15, stating it would not recommend enforcement action to the SEC if MegPrime offered and sold tokens through the Rewards Program in the manner and circumstances described in the no-action request without registration under Section 5 of the Securities Act and without registering the tokens as securities under Section 12(g) of the Exchange Act.
NYSE to Launch 24/7 Tokenized Securities Trading Platform
On January 19, NYSE announced its intention to launch a trading platform for tokenized securities, which would offer 24/7 trading of digital tokens, instant settlement, orders sized in dollar amounts, and stablecoin-based funding, a marked difference from NYSE’s current operations. Holders of these tokenized securities will have traditional governance and economic rights, including voting and participation in dividends. According to the press release, NYSE has been in contact with the SEC about the development of the trading platform and its tokenization initiatives, as regulatory approval will be required to proceed with the launch.
The launch of NYSE’s tokenized securities trading platform comes on the heels of the SEC’s no-action relief allowing the Depository Trust Company (DTC) to pilot a preliminary version of its securities tokenization program, as described in our previous alert. Together with the DTC’s program, the NYSE’s tokenized trading platform could incentivize more issuers to tokenize their securities and make tokenized securities more accessible to U.S. investors. Certain crypto firms have already launched tokenized securities that track popular stocks such as Amazon, Apple, and Tesla, and trade 24/7 on foreign exchanges. However, regulators have had concerns about the effects of price deviations of these tokenized securities from the underlying stocks. We expect more details on the NYSE tokenized trading platform to become available as NYSE undertakes regulatory approvals.
What these Developments Mean for the Digital Assets Market
The SEC’s no-action relief confirming that the tokens granted under the MegPrime Rewards Program are not securities along with the NYSE’s intention to launch a tokenized securities trading platform demonstrate regulators and market operators’ commitment to provide clarity in the marketplace. These actions also demonstrate a commitment to explore ways in which digital assets and blockchain technology can improve traditional market infrastructures and capital formation, despite the stalling of digital asset market structure legislation at the Senate.
As the year progresses, participants in the digital asset market and other stakeholders are encouraged to continue to monitor legislation and actions by the SEC, stock exchanges, and other regulators to remain informed on regulatory developments and emerging guidance related to digital assets, as well as new trading platforms for digital assets.