The U.S. Securities and Exchange Commission (SEC) has issued a warning to Grayscale, stating that Filecoin (FIL) tokens qualify as securities. Grayscale, a crypto manager that is part of the Digital Currency Group, was asked to retract the Form 10 request submitted for the Filecoin Trust. This request would have made it an entity reporting its quarterly results, similar to a publicly traded company.
The SEC has guided Grayscale to register as an investment vehicle under the Investment Company Act of 1940. However, if the Filecoin Trust is registered as an investment company, it could hinder its ability to issue securities, among other limitations. To classify as an investment company, the Filecoin Trust would have to be categorized as an entity that primarily deals in the investment of securities.
In order to meet this requirement, FIL would have to pass the Howey Test, which determines if a transaction qualifies as an investment contract and can be considered a security. According to the Howey Test, a transaction is considered an investment contract 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, FIL has a legitimate use case as a method of payment for Filecoin’s data storage services. Therefore, it is possible that this alone could disqualify FIL from passing the Howey Test.
Grayscale has decided to dispute the SEC’s decision. In a press release, the company stated that it does not believe FIL is a security under federal securities laws. Grayscale plans to respond to the SEC staff with an explanation of the legal basis for its position. However, the company cannot predict whether the SEC staff will be persuaded of their position. If not, Grayscale may have to enable the Trust to register under the ICA of 1940 or seek dissolution of the Trust.
Following the SEC’s warning, the token’s price briefly decreased. However, according to CoinGecko, the token has rebounded and was trading at around $4.60 at the time of writing this article.