SEC Commissioner Hester Peirce on Feb. 6, 2020, delivered a thought-provoking speech entitled Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization, accompanied by a preliminary three-year safe harbor for network development projects to issue tokens. The proposed Securities Act Rule 195, authored solo by Commissioner Peirce, one of five SEC Commissioners, outlined a framework under which developmental tokens would be afforded a registration exemption for up to three years if the proposed rule were made policy. The aim of the rule is to provide token networks with a sufficient incubation period to achieve “network maturity,” enabling tokens to be transferred into the hands of token-holders without violating U.S. securities laws.

The draft Rule 195 followed on the heels of the SEC’s October 2019 filing of the publicized complaint and motion for a restraining order against defendants Telegram Group Inc. and TON Issuer Inc. from continuing their ongoing offering of digital assets, called “Grams.” The SEC rejected the notion that the Grams were now, instead, currency (rather than securities) because there were not any products or services that could be purchased with Grams. The SEC said there was an expectation on the part of investors that they would profit if Telegram builds out the network functionalities it promised. In June 2020, the Telegram defendants settled charges with the SEC and agreed to return more than $1.2 billion to investors and to pay an $18.5 million civil penalty. Commissioner Peirce’s proposed safe harbor solution was timely and seems even more so juxtaposed with the Telegram outcome. Following Telegram, the stark regulatory gap between digital asset development and decentralization is further pronounced with continued significant economic consequences for market participants unable to complete their projects some years in the making.

At its core, the pro-forma Rule 195 would allow digital assets to be treated as non-securities, subject only to anti-fraud rules, for a period of three years before the SEC would apply the Howey Test to determine whether the digital asset is sufficiently decentralized and thus not a type of security known as an investment contract.

“Many crypto entrepreneurs are seeking to build decentralized networks in which a token serves as a means of exchange on, or provides access to a function of the network,” Peirce said in the speech explaining her support of the initiative. View both the speech and the proposed Securities Act Rule 195 here. “In the course of building out the network, they need to get the tokens into the hands of other people. But these efforts can be stymied by concerns that such efforts may fall within the ambit of federal securities laws. The fear of running afoul of the securities laws is real. Given the SEC’s enforcement activity in this area, these fears are not unfounded.”

She noted that proposed Securities Act Rule 195 would amend the SEC’s current regulatory framework that functions as a barrier to launching token networks, because those who offer the tokens risk the tokens being deemed regulated securities before the projects have time to mature into decentralized networks. She added that the safe harbor rule would exempt certain tokens for the recommended three-year period, subject to various conditions, with the goal of creating a regulatory environment that promotes fairness and predictability, while encouraging new offerings and the resulting concomitant competition and innovation.

“The tests laid out in the safe harbor are meant as proxies for the considerations raised in the SEC’s Howey analysis and attempt to bring clarity on when a token transaction should not be considered a securities transaction. These tests should be easier to pass at the end of three years than when the network is first launched,” Peirce said. “Once the network cannot be controlled or unilaterally changed by any single person, entity, or group of persons or entities under common control, the token that operates on that network will not look like a security. Even for a network that remains centralized—think of the networks outlined in the TurnKey Jet and Pocketful of Quarters no-action letters—once the tokens are actually in use to buy and sell the services for which they were intended, the securities laws will be clearly inapplicable.”

The proposed Securities Act Rule 195 would also create an exemption under the Exchange Act of 1934, allowing token exchanges to facilitate digital asset sales transactions that were conducted pursuant to the rule. These exchanges would be considered exempt from the Exchange Act’s definitions of “exchange,” “broker,” and “dealer” if activities are conducted pursuant to Rule 195.

“The safe harbor … recognizes the need to achieve the investor protection objectives of the securities laws, as well as the need to provide the regulatory flexibility that allows innovation to flourish,” Peirce said. “Accordingly, the safe harbor protects token purchasers by requiring disclosures tailored to their needs, preserving the application of the antifraud provisions of the securities laws, and giving them an ability to participate in networks of interest to them. The safe harbor would provide network entrepreneurs sufficient time to build their networks before having to measure themselves against a decentralization or functionality yardstick.”

Footnote 1 to Commissioner Peirce’s speech added she did not expect the approach taken to date in Commission enforcement cases addressing digital assets to change in light of the safe harbor proposal. The token safe harbor has not, to date, been included in SEC proposed rulemaking releases. The framework could, alternatively, be the starting point for other draft federal and/or state legislation addressing the current void for network developers in transferring their digital assets and evolving into the decentralized network.

The Commissioner invites those interested in providing comments on the proposal to email her office at or to connect with the FinHub.