Securities Regulation Daily Wrap Up, BLOCKCHAIN—Senate ‘Regulation DA’ discussion draft would upend key parts of Howey test, (Jul 25, 2025)
Organizations Mentioned:Digital Asset
The discussion draft from GOP members of the Senate Banking Committee would compete with some provisions in the House-passed CLARITY Act.
Senate Banking Committee Chair Tim Scott (R-SC), along with Senators Cynthia Lummis (R-Wyo), Bernie Moreno (R-Ohio), and Bill Hagerty (R-Tenn), have published a discussion draft of a digital asset bill they hope will complement portions of the Digital Asset Market Clarity (CLARITY) Act of 2025 (H.R. 3633) that recently passed the House with bipartisan support. The Senate draft, dubbed the Responsible Financial Innovation Act of 2025 (RFIA), would address only securities and banking issues within the Banking Committee’s jurisdiction, although the Senate Agriculture Committee, which held a hearing on digital assets earlier this month (statement from the Chair), would have to weigh-in on any commodities issues within its jurisdiction.
“My colleagues and I in the House and Senate share the same goal: to provide clear rules of the road for digital assets that protect investors, foster innovation, and keep the future of digital finance anchored in America,” said Scott via press release. “I’m grateful for the hard work of our House counterparts to craft smart, bipartisan legislation, and I look forward to building on their work here in the Senate.”
Market structure legislation around digital assets is considered to the be next step for many lawmakers after the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act (S. 1582) became law on July 18, 2025. To that end, Scott and his co-sponsors have asked the public to submit comments on the RFIA discussion draft. Comments are requested on: regulatory clarity and tailoring, investor protection, trading venues and market infrastructure, custody, illicit finance, banking, innovation, preemption.
Ancillary asset exemption. The RFIA would require the SEC to adopt a new Regulation DA addressing a variety of issues associated with digital assets. Regulation DA would have to provide for a transaction exemption for ancillary assets where the transaction involved the greater of $75 million in gross proceeds per calendar year over not more than four years or 10 percent of the total dollar value of outstanding ancillary assets as of the date of the offer or sale. The dollar amounts would be periodically adjusted for inflation.
A different provision of the RFIA would define “ancillary asset” to mean an intangible and commercially fungible asset (e.g., digital commodities) that is offered, sold, or distributed to a person through an investment contract. “Ancillary asset” would exclude from its definition assets that entitled the owner of the asset to debt and equity interests, liquidation rights, rights to receive dividends or interest, and to certain other financial interests.
The SEC also would have to separately define what constitutes an investment contract because offering, selling, or distributing an ancillary asset hinges on the asset being transferred via an investment contract.
Investment contracts. The SEC would have to engage in rulemaking under the RFIA to clarify the definition of “investment contract.” The language of the RFIA would significantly upend the Supreme Court’s Howey test for whether something is an investment contract under the federal securities laws. Perhaps the best way to grasp how the test would change is to compare the Howey test to the RFIA directly:
Howey requires an investment of money, which is a rather loose element of the test and typically is easily satisfied. Under the RFIA, there would have to be an investment of money, but that investment must be non-de minimis and it must be made in a business entity.
Howey requires a common enterprise. Although courts sometimes differ on precisely what must be alleged under this prong of Howey, courts often look for vertical and/or horizontal commonality among the parties to an investment contract. The RFIA would still require a common enterprise, but “commonality” would not be required.
Under Howey, an investor must have a reasonable expectation that others will use their entrepreneurial or management skills to profitably run the enterprise. Here, the RFIA would impose several clarifying requirements. First, there must be an agreement in which the issuer promises to perform essential managerial efforts for the enterprise. Moreover, the RFIA would require that the investor reasonably expect profits based on the terms of the agreement and statements by the counterparty (or its agent) which, in the context clearly indicate the statements are made or authorized by the enterprise and accessible to the investor.
As noted immediately above, Howey requires a reasonable expectation of profits. The RFIA would add to this requirement by specifying that profits must be derived from the entrepreneurial or management efforts of the counterparty (or agent) on behalf of the enterprise and that: (1) the profits are post-sale and essential to the operation or success of the enterprise; and (2) that profits would not include ministerial, technical, or administrative activities.
The RFIA’s provisions, however, would not directly address the Supreme Court’s Reves test (i.e., the family resemblance test) for whether an instrument is a note. Digital assets can be issued in either equity or debt formats and, thus, can invoke Howey and/or Reves. The several firms that sought SEC no-action letters regarding tokens believed not to be securities often explicitly addressed both Howey and Reves in their no-action letter requests.
The SEC would have to adopt a regulation incorporating the RFIA’s proposed changes to the definition of “investment contract” along with clear criteria and definitions regarding the term within two years after enactment of the RFIA. Specifically, the regulation would have to state that a contract is an investment contract only if all of the requirements set forth in the RFIA are met. At the proposal stage, the SEC’s implementing regulation would be subjected to an unusually long and statutorily required public comment period of 180 days (traditionally, most SEC rulemakings would have 30-, 60-, or 90-day comment periods).
Additional provisions. The RFIA also would more broadly impact the SEC’s mission and require a review of existing regulations to accommodate digital assets. The SEC’s mission, for example, would include “innovation” in addition to the SEC's exiting mandate to consider: (1) “whether an action is necessary or appropriate in the public interest”; (2) “the protection of investors”; and (3) “whether the action will promote efficiency, competition, and capital formation.” The House-passed CLARITY Act would make similar changes to the SEC’s mission.
The RFIA also would require the SEC to engage in rulemaking to amend its books and records regulations for broker-dealers, transfer agents, national securities exchanges, investment advisers, and investment companies such that these entities may consider records created using distributed ledger technologies.
Lastly, the RFIA would address banking regulations, illicit finance, and a variety of additional topics, including, the establishment of a micro-innovation sandbox, excluding non-controlling developers and providers from the federal money transmission laws, and the protection of individuals’ right to engage in self-custody.
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