SEC vs. Consensys: Understanding the Statutory Framework for Securities Regulation

A. Statutory and legal framework

24. The Securities Act and the Exchange Act “form the backbone of U.S. securities law.” Slack Tech., LLC v. Pirani, 598 U.S. 759, 762 (2023). These statutes define “security” broadly to include a wide range of assets, including “investment contracts.” (15 U.S.C. §§ 77b(a), 78c(a)(10)).

25. Investment contracts are vehicles by which a person invests money in a joint venture and has a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of another person.

26. Congress has defined “security” broadly to embody “a flexible, not a static, principle, one capable of adapting itself to the innumerable and changing schemes devised by those who seek to exploit the money of others for the promise of profit.” SEC v. W. J. Howey Co., 328 U.S. 293, 299 (1946).

i. Registration of Securities Offerings

The 27th Congress enacted the Securities Act to, among other things, regulate the offer and sale of securities.

28. Sections 5(a) and 5(c) of the Securities Act (15 U.S.C. §§ 77e(a) and (c)) require registration of offers and sales of securities with the SEC.

29. Registration is intended to ensure that persons offering or selling securities provide investors with the required information about the issuer, the securities and the transaction. With this information, investors can make more informed investment decisions.

ii. Registration of brokers

30. Section 3(a)(4) of the Exchange Act (15 U.S.C. § 78c(a)(4)) defines a “broker-dealer” generally as “any person engaged in the business of dealing in securities for the account of others.”

31. Section 15(a) of the Exchange Act (15 U.S.C. § 78c(a)(4)) generally requires broker-dealers to register with the SEC, and a broker-dealer must also become a member of one or more “self-regulatory organizations” (“SROs”), which in turn require members to comply with rules governing the activities of SRO members.

32. The regulatory regime applicable to broker-dealers is a cornerstone of the federal securities laws and provides important protections for investors and market participants. Registered broker-dealers are subject to comprehensive regulations and rules that include recordkeeping and reporting obligations, SEC and SRO examinations, and general and specific requirements designed to address certain conflicts of interest, among other things. All of these rules and regulations are critical to the soundness of the nation’s securities markets and the protection of investors in public markets who interact with broker-dealers and invest in securities.