Title: Clarity for Digital Tokens Act of 2021
Policy area: Finance and Financial Sector

Summary:
Clarity for Digital Tokens Act of 2021
This bill excludes certain offerings of digital tokens (i.e., a digital representation of value or rights recorded on a publicly available ledger) from securities registrations.
The exclusion from securities registration is in effect until the later of 3 years from the date of the first sale of a token or 3 years after the effective date of the bill. During this exclusionary period, the initial development team of a token must disclose every 6 months details of the network—the system of connected devices that create and validate the ledger of transactions. This includes disclosure of the source code, the transaction history, the economics of the token, the plan to achieve network maturity, prior token sales, information regarding the team, trading platforms used, and certain material transactions.
On or before the end of this period, the team must report to the Securities and Exchange Commission regarding the maturity of the network. Network maturity is reached either through decentralization of the network or through network functionality, as specified by the bill. If network maturity is not reached within 3 years, the initial development team must register the tokens as a security.

[Congressional Bills 117th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5496 Introduced in House (IH)]

<DOC>






117th CONGRESS
  1st Session
                                H. R. 5496

   To amend the Securities Act of 1933 to provide a safe harbor for 
        transactions in certain tokens, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            October 5, 2021

 Mr. McHenry (for himself, Mr. Davidson, and Mr. Budd) introduced the 
   following bill; which was referred to the Committee on Financial 
                                Services

_______________________________________________________________________

                                 A BILL


 
   To amend the Securities Act of 1933 to provide a safe harbor for 
        transactions in certain tokens, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Clarity for Digital Tokens Act of 
2021''.

SEC. 2. TOKEN SAFE HARBOR.

    (a) In General.--The Securities Act of 1933 (15 U.S.C. 77d) is 
amended by inserting after section 4A the following:

``SEC. 4B. TOKEN SAFE HARBOR.

    ``(a) In General.--Except as provided under subsection (d), this 
title does not apply to any offer, sale, or other transaction involving 
a token if the following conditions are satisfied by the initial 
development team of such token:
            ``(1) The initial development team intends for the network 
        on which the token functions to reach network maturity not 
        later than the later of--
                    ``(A) the date that is three years after the first 
                sale of such token; or
                    ``(B) the date that is three years after the 
                effective date of this section.
            ``(2) The token is offered and sold for the purpose of 
        facilitating access to, participation on, or the development of 
        the network.
            ``(3) The initial development team complies with--
                    ``(A) the disclosure requirements under subsection 
                (b);
                    ``(B) the notice of reliance on the safe harbor 
                filing requirements under subsection (c); and
                    ``(C) the exit report filing requirements under 
                subsection (f).
    ``(b) Disclosure Requirements.--The initial development team shall 
disclose the following information on a freely accessible public 
website:
            ``(1) Initial disclosures.--Prior to filing a notice of 
        reliance under subsection (c), and with such information 
        updated as soon as practicable after any material change:
                    ``(A) Source code.--A text listing of commands to 
                be compiled or assembled into an executable computer 
                program used by network participants to access the 
                network, and confirm transactions.
                    ``(B) Transaction history.--A narrative description 
                of the steps necessary to independently access, search, 
                and verify the transaction history of the network.
                    ``(C) Token economics.--A narrative description of 
                the purpose of the network, the protocol, and its 
                operation, including--
                            ``(i) information explaining the launch and 
                        supply process, including the number of tokens 
                        to be issued in an initial allocation, the 
                        total number of tokens to be created, the 
                        release schedule for the tokens, and the total 
                        number of tokens outstanding;
                            ``(ii) information detailing any applicable 
                        consensus mechanism or process for validating 
                        transactions, method of generating or mining 
                        tokens, and any process for burning or 
                        destroying tokens on the network;
                            ``(iii) an explanation of governance 
                        mechanisms for implementing changes to the 
                        network or protocol; and
                            ``(iv) sufficient information for a third 
                        party to create a tool for verifying the 
                        transaction history of the token.
                    ``(D) Plan of development.--The current state and 
                timeline for the development of the network to show how 
                and when the initial development team intends to 
                achieve network maturity.
                    ``(E) Prior token sales.--For token sales completed 
                prior to filing a notice of reliance under subsection 
                (c), the date of sale, number of tokens sold, number of 
                token purchasers, any limitations or restrictions on 
                the transferability of tokens sold, price per token, 
                and the type and amount of consideration received.
                    ``(F) Initial development team and certain token 
                holders.--
                            ``(i) The names and relevant experience, 
                        qualifications, attributes, and skills of each 
                        person who is a member of the initial 
                        development team.
                            ``(ii) The number of tokens or rights to 
                        tokens owned by each member of the initial 
                        development team and a description of any 
                        limitations or restrictions on the 
                        transferability of tokens held by such persons.
                            ``(iii) If any member of the initial 
                        development team or related person has a right 
                        to obtain tokens in the future, in a manner 
                        that is distinct from how any third party could 
                        obtain tokens, the identity of such person and 
                        a description of how such tokens may be 
                        obtained.
                    ``(G) Trading platforms.--The name of any secondary 
                trading platforms on which the token trades, to the 
                extent known.
                    ``(H) Related person transactions.--A description 
                of any material transaction, or any proposed material 
                transaction, in which the initial development team is a 
                participant and in which one or more related persons 
                participate and had or will have a direct or indirect 
                material interest. The description shall identify the 
                nature of the transaction, the related persons, the 
                basis on which the persons are related persons, and the 
                approximate value of the amount involved in the 
                transaction.
                    ``(I) Warning to token purchasers.--A statement 
                that the purchase of tokens involves a high degree of 
                risk and the potential loss of money.
            ``(2) Semiannual disclosures.--
                    ``(A) In general.--Every six months, an updated 
                plan of development described under paragraph (1)(D).
                    ``(B) Timing of disclosures.--Each disclosure 
                required under subparagraph (A) shall be made--
                            ``(i) within 30 calendar days after the end 
                        of the applicable semiannual period; and
                            ``(ii) until the earlier of--
                                    ``(I) the safe harbor end date; or
                                    ``(II) the date on which the 
                                initial development team determines 
                                that network maturity has been reached.
            ``(3) Post-filing token sale disclosures.--For token sales 
        completed after filing a notice of reliance under subsection 
        (c), the date of sale, number of tokens sold, number of token 
        purchasers, any limitations or restrictions on the 
        transferability of tokens sold, price per token, and the type 
        and amount of consideration received.
            ``(4) Ongoing disclosures with respect to sales of tokens 
        by initial development team.--Each time a member of the initial 
        development team sells at least five percent of the member's 
        tokens that were disclosed pursuant to paragraph (1)(F)(ii) 
        over any period of time before the safe harbor end date, a 
        disclosure of the date of the sale, the number of tokens sold, 
        and the identity of the seller.
    ``(c) Notice of Reliance on Safe Harbor Filing Requirements.--
            ``(1) In general.--The initial development team shall file 
        with the Commission a notice of reliance on the safe harbor 
        provided under this section prior to the date of the first 
        token sold in reliance on the safe harbor, except as expressly 
        provided under subsection (h) with respect to tokens sold 
        before the date on which this section takes effect.
            ``(2) Contents.--The notice described under paragraph (1) 
        shall contain the following information:
                    ``(A) The name of each person on the initial 
                development team.
                    ``(B) An attestation by a person duly authorized by 
                the initial development team that the initial 
                development team have complied with the requirements of 
                this section.
                    ``(C) The website where disclosure required under 
                subsection (b) may be accessed.
                    ``(D) An email address at which the initial 
                development team can be contacted.
    ``(d) Limitation.--This section shall have no effect on the 
application of section 12(a)(2) or 17.
    ``(e) Duration of Exemption.--With respect to tokens, the relief 
provided by this section shall expire on the later of--
            ``(1) the date that is three years after the date of the 
        first sale of the tokens; or
            ``(2) the date that is three years after the effective date 
        of this section.
    ``(f) Exit Report Filing Requirements.--On or before the safe 
harbor end date, the initial development team shall file an exit report 
with the Commission containing the following:
            ``(1) Decentralized networks.--If the initial development 
        team determines that network maturity has been reached for a 
        decentralized network, a legal analysis that includes--
                    ``(A) a description of the extent to which 
                decentralization has been reached across a number of 
                dimensions, including voting power, development 
                efforts, and network participation and, if applicable--
                            ``(i) examples of material engagement on 
                        network development and governance matters by 
                        parties unaffiliated with the initial 
                        development team; and
                            ``(ii) explanations of quantitative 
                        measurements of decentralization; and
                    ``(B) an explanation of how the initial development 
                team's pre-network maturity activities are 
                distinguishable from the team's ongoing involvement 
                with the network, including--
                            ``(i) a discussion of the extent to which 
                        the initial development team's continuing 
                        activities are more limited in nature and 
                        cannot reasonably be expected uniquely to drive 
                        an increase in the value of the tokens;
                            ``(ii) a confirmation that the initial 
                        development team has no material information 
                        about the network that is not publicly 
                        available; and
                            ``(iii) a description of the steps taken to 
                        communicate to the network the nature and scope 
                        of the initial development team's continuing 
                        activities.
            ``(2) Functional networks.--If the initial development team 
        determines that network maturity has been reached for a 
        functional network, a legal analysis that includes--
                    ``(A) a description of the holders' use of tokens--
                            ``(i) for the transmission and storage of 
                        value on the network;
                            ``(ii) for the participation in an 
                        application running on the network; or
                            ``(iii) otherwise in a manner consistent 
                        with the utility of the network; and
                    ``(B) an explanation of how the initial development 
                team's pre-network maturity marketing efforts and the 
                team's ongoing efforts will continue to be focused on 
                the token's consumptive use, and not on token price 
                appreciation.
            ``(3) No network maturity.--If the initial development team 
        determines that network maturity has not been reached--
                    ``(A) a description of the status of the project 
                network and the next steps the initial development team 
                intends to take;
                    ``(B) contact information for the initial 
                development team that can be used by holders to 
                communicate with the initial development team; and
                    ``(C) a statement acknowledging that the initial 
                development team will register the tokens as a class of 
                securities under section 12(g) of the Securities 
                Exchange Act of 1934 within 120 days of the filing of 
                the report under this subsection.
    ``(g) Transition Period for Trading Platforms.--No trading platform 
shall be subject to the requirements of section 6 of the Securities 
Exchange Act of 1934 due to activity related to the trading of tokens 
subject to a determination described under subsection (f)(3), if the 
trading platform prohibits such trading within six months of such 
determination.
    ``(h) Tokens Previously Sold.--If, before the date on which this 
section takes effect, an initial development team sold tokens 
(including such tokens sold pursuant to a valid exemption from 
registration or in violation of section 5 (as determined in a 
Commission order pursuant to section 8A that does not identify any 
other violations of the Federal securities laws)), the initial 
development team may make use of the safe harbor provided under this 
section, if the initial development team files the notice of reliance 
described under subsection (c) as soon as practicable.
    ``(i) Definition of Qualified Purchaser.--For purposes of section 
18(b)(3), a `qualified purchaser' includes any person to whom tokens 
are offered or sold in reliance on this section.
    ``(j) Disqualifications.--This section shall not apply to tokens if 
the initial development team, or any individual member of the initial 
development team, would be subject to disqualification under Rule 
506(d) (17 C.F.R. 230.506(d)).
    ``(k) Definitions.--In this subsection:
            ``(1) Initial development team.--The term `initial 
        development team' means each person, group of persons, or 
        entity that provides the essential managerial efforts for the 
        development of a network prior to reaching network maturity.
            ``(2) Network.--The term `network' means a system of 
        devices connected to each other to create and validate a ledger 
        of transactions occurring within the system, including a system 
        of devices accessing and operating a protocol that utilizes an 
        existing network for transaction creation and validation.
            ``(3) Network maturity.--The term `network maturity' means 
        the status of a decentralized or functional network that is 
        achieved when the network meets either of the following:
                    ``(A) Control.--The network is not economically or 
                operationally controlled and is not reasonably likely 
                to be economically or operationally controlled or 
                unilaterally changed by any single person, entity, or 
                group of persons or entities under common control. A 
                network with respect to which the initial development 
                team owns more than 20 percent of tokens or owns more 
                than 20 percent of the means of determining network 
                consensus does not meet the requirements of this 
                subparagraph.
                    ``(B) Functional.--The network is functional, as 
                demonstrated by the use of the tokens by token holders 
                for the transmission and storage of value on the 
                network, the participation in an application running on 
                the network, or otherwise in a manner consistent with 
                the utility of the network.
            ``(4) Related person.--The term `related person' means--
                    ``(A) the initial development team;
                    ``(B) directors or advisors to the initial 
                development team; and
                    ``(C) immediate family members of the individuals 
                described under subparagraph (A) or (B).
            ``(5) Safe harbor end date.--The term `safe harbor end 
        date' means the date that is the end of the 3-year period 
        described under subsection (e).
            ``(6) Token.--The term `token' means a digital 
        representation of value or rights that--
                    ``(A) has a transaction history that--
                            ``(i) is recorded on a distributed ledger, 
                        blockchain, or other publicly accessible and 
                        auditable digital data structure;
                            ``(ii) has transactions confirmed through 
                        an independently verifiable process; and
                            ``(iii) cannot be easily modified, and 
                        where any modification is subject to the 
                        network consensus rules;
                    ``(B) is capable of being transferred between 
                persons without an intermediary party; and
                    ``(C) does not represent a financial interest in a 
                centralized company, partnership, or fund, including an 
                ownership or debt interest, revenue share, or 
                entitlement to any interest or dividend payment.''.
    (b) Amendments to the Securities Exchange Act of 1934.--
            (1) Definition of exchange.--Section 3(a)(1) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(1)) is 
        amended by adding at the end the following: ``The term 
        `exchange' does not include a person, organization, 
        association, or group of persons to the extent such person, 
        organization, association, or group of persons constitutes, 
        maintains, or provides a marketplace or facilitates bringing 
        together purchasers and sellers of tokens subject to a safe 
        harbor under section 4B of the Securities Act of 1933, or 
        otherwise performs with respect to such tokens the functions 
        commonly performed by a stock exchange as that term is 
        generally understood.''.
            (2) Definition of broker.--Section 3(a)(4) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)) is 
        amended by adding at the end the following:
                    ``(G) Exception with respect to certain tokens.--
                The term `broker' does not include a person to the 
                extent the person engages in the business of effecting 
                transactions in tokens subject to a safe harbor under 
                section 4B of the Securities Act of 1933 for the 
                account of others.''.
            (3) Definition of dealer.--Section 3(a)(5) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)) is 
        amended by adding at the end the following:
                    ``(D) Exception with respect to certain tokens.--
                The term `dealer' does not include a person to the 
                extent the person engages in the business of buying and 
                selling tokens subject to a safe harbor under section 
                4B of the Securities Act of 1933 for such person's own 
                account through a broker or otherwise.''.
            (4) Definition of clearing agency.--Section 3(a)(23)(B) of 
        the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)(B)) 
        is amended--
                    (A) by striking ``, or (vi)'' and inserting ``; 
                (vi)''; and
                    (B) by striking the period at the end and inserting 
                ``; or (vii) a person, organization, association, or 
                group of persons with respect to activities specified 
                in subparagraph (A) involving tokens subject to a safe 
                harbor under section 4B of the Securities Act of 
                1933.''.
            (5) Definition of transfer agent.--Section 3(a)(25) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(25)) is 
        amended--
                    (A) by striking ``or any registered clearing 
                agency'' and inserting ``, any registered clearing 
                agency''; and
                    (B) by striking the period at the end and inserting 
                ``, or any person, organization, association, or group 
                of persons who performs such functions solely with 
                respect to tokens subject to a safe harbor under 
                section 4B of the Securities Act of 1933.''.
            (6) Registration exemption.--Section 12(g)(2) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(2)) is 
        amended by adding at the end the following:
            ``(I) any token offered and sold in reliance on a safe 
        harbor under section 4B of the Securities Act of 1933.''.
    (c) Amendment to the Investment Advisers Act of 1940.--Section 
202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(11)) is amended by adding at the end the following: ``The term 
`investment adviser' does not include a person to the extent the person 
advises others with respect to, or issues or promulgates analyses or 
reports concerning, tokens subject to a safe harbor under section 4B of 
the Securities Act of 1933.''.
    (d) Rulemaking.--Not later than the end of the 1-year period 
beginning on the date of enactment of this Act, the Securities and 
Exchange Commission shall issue rules to carry out the amendments made 
by this Act.
    (e) Effective Date.--The provisions of law added by the amendments 
made by this Act shall take effect after the end of the 1-year period 
beginning on the date of enactment of this Act.
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