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Legislator Proposes Securities Law Exception For Digital Assets

California's Corporate Securities Law of 1968 defines "security" by providing a long list of financial instruments.  Cal. Corp. Code Section 25107.  Not included on the list are so-called digital assets.  In modern parlance, a digital asset is an asset that is issued and transferred using distributed ledger or blockchain technology, including, but not limited to, so-called "virtual currencies," "coins," and "tokens."  Strategic Hub for Innovation and Financial Technology of the Securities and Exchange Commission, Framework for “Investment Contract” Analysis of Digital Assets, n. 2.

Although omitted from the list, a digital asset may nevertheless be a security if it meets the definition of an "investment contract", a term that is on the list.  Recently, however, California Assembly Member Ian Calderon has proposed to amend Section 25017 to create a rebuttable presumption that a digital asset is not an investment contract if it meets any one of the following three criteria:

  • The asset is not acquired by the holder in exchange for the payment of fiat currency or another digital asset.

  • The asset is used on a fully operational network and the purpose of the asset is for a consumptive purpose, such as the access or consumption of goods, services, data, or the performance of useful functions other than as a medium of exchange or store of value.

  • The asset does not rely on the managerial efforts of others for its success, with the lack of managerial efforts of others evidenced by the absence of any identifiable person, project team, or management entity that is responsible for the development, improvement, oversight, or promotion of the asset or the related network, and either:

    • Any changes to the software code underlying that asset may be made by network participants.

    • Voting rights over the functioning of the network are conferred to each holder of the asset.

The Commissioner of Business Oversight could rebut the presumption "upon good cause shown by clear and convincing evidence.  It is unclear whether the presumption may be rebutted in a private action.

Assembly Member Calderon's bill, AB 2150, is scheduled to be heard by the Assembly Committing on Banking and Finance next Tuesday.  The Capitol will be open for attendance of this hearing, but the public is strongly encouraged to participate via the web portal or telephonically.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 133


About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...