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The latest in a series of scuffles with crypto-related companies, the SEC has now spoken out about Filecoin (FIL), warning Grayscale that these tokens qualify as securities.
As a result, the crypto manager – who is part of the Digital Currency Group (DCG) – was asked to retract the Form 10 request submitted for the Filecoin Trust, which would have made it an entity reporting quarterly results, much like publicly traded companies.
SEC Views Filecoin Trust as an Investment Company
In a press release published on May 17, a spokesperson for Grayscale confirmed that the SEC has asked the company to retract its application, guiding them to instead register as an investment vehicle in accordance with the Investment Company Act of 1940. If the Filecoin Trust were to register as an investment company, this could hinder its ability to issue securities, among other limitations.
However, in order to qualify as an investment company, the Filecoin Trust would have to be classified as an entity that primarily deals in the investment of securities.
To do so, FIL would have to pass the Howey Test, which decides if a transaction qualifies as an investment contract and can therefore be considered a security.
A transaction is regarded as an investment contract according to the Howey Test if it is an investment of money in a common enterprise, with the expectation of profit to be derived from the efforts of others. However, as FIL has a legitimate use case as a method of payment for Filecoin’s data storage services, it’s quite possible that this alone would disqualify FIL from passing the Howey Test.
Grayscale Promises to Fight Back
According to the press release, Grayscale has decided to fight the SEC’s decision, although the firm will comply if it cannot convince the regulatory entity.
“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.
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.”
News of the latest regulatory action targeting FIL sent the token’s price on a brief downward trend. However, according to CoinGecko, the token has since rebounded and was trading at around $4.60 at the time this article was written.