Colorado Digital Token Act Facilitates the Sale & Transfer of Digital Tokens Within Colorado
Colorado recently passed the Colorado Digital Token Act (Act), which, unlike most states, explicitly addresses digital tokens and facilitates the sale and transfer of digital tokens within Colorado.
Colorado recently passed the Colorado Digital Token Act (Act), which, unlike most states, explicitly addresses digital tokens and facilitates the sale and transfer of digital tokens within Colorado. Specifically, the Act exempts the offer or sale of “digital tokens” that primarily have a “consumptive purpose” from state securities registration as long as certain transactional conditions are met, and exempts the digital token issuer and those persons acting on its behalf from the broker-dealer and salesperson licensing requirements of the Colorado Securities Act (CSA).
The Act defines the term “digital token” as a digital unit that is:
• Created by deploying computer code to a blockchain network and/or in response to verification or collection of transactions relating to a digital ledger or blockchain.
• Recorded in a digital ledger or database that is chronological, consensus-based, decentralized, and mathematically verified in nature.
• Capable of being traded or transferred between persons without an intermediary or custodian of value.
The Act further provides that the offer and sale of a “digital token” must primarily have a “consumptive purpose” at the time of issuance or within 180 days after sale, and not be offered or sold for speculative or investment purposes. The Act defines a “consumptive purpose” to mean providing or receiving goods, services, or content, including access to such goods, services, or content.
Under the Act, the offer and sale of a digital token will be exempt from the registration requirements of the CSA if the following conditions are satisfied:
- The offer or sale occurs after the Securities Commissioner adopts rules to implement the Act.
- The offer or sale complies with the registration exemption requirements and any rules under the Act.
- The digital token issuer files a notice of intent with the Securities Commissioner prior to an offer.
- The primary purpose of the digital token is a consumptive purpose.
- The digital token issuer markets the digital token for consumptive purposes (rather than investment purposes); and either: (i) the consumptive purpose can be realized at the time of sale; or, (ii) all of the following are met: (A) the consumptive purpose will be available within 180 days of sale or transfer of the digital token; (B) the initial buyer is prohibited from reselling or transferring the digital token until the consumptive purpose of the digital token is available; and (C) the initial buyer provides a clear acknowledgement that the primary intent of its purchase is to use the digital token for a consumptive purpose.
The Act also provides that any person that engages in the business of effecting or attempting to effect the purchase, sale, or transfer of a digital token is exempt from the licensing requirements of the CSA if:
- The transactions occur after the Securities Commissioner adopts rules to implement the Act.
- The person complies with the licensing exemption requirements and the rules under the Act.
- The person files a notice of intent with the Securities Commissioner prior to an offer.
- The digital token can be used for a consumptive purpose at the time the person effects the purchase, sale, or transfer of the digital token.
- The person takes reasonably prompt action to cease effecting the transaction if not in compliance with the licensing exemption requirements.
In addition, the notice filings required by the Act that fail to comply with, or violate, the Act or rules under the CSA, may be rejected or require resubmission to cure deficiencies. There is no presumption that digital token offerings will be integrated with other securities offerings (such as common stock) conducted by the same digital token issuer. However, the issuer remains subject to the antifraud provisions under the CSA.
Since April 2018, securities regulators from more than 40 jurisdictions throughout North America have participated in “Operation Cryptosweep,” which has resulted in more than 330 inquiries and investigations and at least 85 enforcement actions related to initial coin offerings or cryptocurrency investment products.
As a result, state regulators have started to focus on these types of offerings. Colorado joins Montana and Wyoming as states with noteworthy legislation or regulations focused on offerings of crypto-related investment products. Like Colorado, Montana’s legislation became effective earlier this year.
Under the Montana Securities Act, blockchain-based utility tokens are exempt from state securities laws so long as the tokens have a “primarily consumptive” purpose and a pre-offering notice is filed. However, unlike Colorado, Wyoming has focused its efforts on exempting digital token offerings from its Money Transmitter Act.
Wyoming has enacted a series of regulations designed to exempt “utility tokens” from the state money transmission laws provided the token (i) is not offered as an investment; (ii) is exchangeable for services and goods; and (iii) the issuer or developer must not deliberately make efforts to find a secondary market for the token.
Colorado has now positioned itself by adopting the Act as a “hub for companies and entrepreneurs that seek to utilize cryptoeconomic systems to power blockchain technology-based business models.” Although the Act applies only to intrastate digital token offerings, it does permit the Securities Commissioner to enter into agreements with federal, state, or foreign regulators “to allow digital tokens issued, purchased, sold, or transferred in [Colorado] to be issued, purchased, sold, or transferred in another jurisdiction and any digital tokens issued, purchased, sold, or transferred in another jurisdiction to be issued, purchased, sold, or transferred in [Colorado].”
It is still unclear, however, what steps the Securities Commissioner may propose to influence other states’ treatment of digital token offerings, especially if and when an offering crosses into other states. In the absence of federal regulation, the Act is a step towards providing some guidance in this area and avoid state enforcement.
Although the Act became effective in August 2019, implementation of the Act is conditioned upon the Securities Commissioner adopting rules as necessary to implement the provisions of the Act, which have not been adopted to date.
The Digital Token Act, dated Feb. 26, 2019, can be found here.