Digital Assets or Securities?

The Israel Securities Authority is proposing to apply the same laws to digital assets as apply to financial assets, which are under the ISA’s supervision. The legislative amendments include revisions to definitions of the various spheres of supervision prescribed in securities law; changes relating to public offerings, the operation of stock exchanges, investment counseling and marketing, portfolio management, and mutual funds; and sections authorizing the ISA to make adjustments to protect the interests of the investing public in light of the characteristics of digital assets. The proposed amendments’ implications go beyond the realm of digital assets.

The proposal is not attempting to contend with the major differences between the various types of digital assets, even though the ISA recognizes the significant differences between them in the explanation of the proposal.

Following are the highlights of the proposed amendments:

Proposed amendments to the Securities Law:

1. Revising the definition of “securities” to also include certificates issued by individuals (and not just by corporations).
2. Adding to the revised definition of “securities” that the certificates are being issued “for the purpose of a financial investment.”
3. Eliminating from the revised definition of “securities” the requirement that certificates be “issued in a series” or have a particular or uniform format, such as a written instrument.
4. Adding the definition of “digital assets” under the definitions section to mean “a digital representation of a value or right, which is used for the purpose of a financial investment, and which may be electronically transferred and stored using distributed ledger technology (DLT) or other technology.”
5. Expanding the definition of “financial instrument” to also include digital assets.
6. The ISA is seeking to obtain authority to prescribe additional provisions or to issue exemptions from the law’s provisions if it deems it necessary, in order to enable it to contend with the unique and dynamic nature of digital assets.

Proposed amendments to the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law:

1. The definition of “securities” will also include securities offered to the public pursuant to a prospectus even if they are not listed for trading on the TASE, and the definition of “foreign security” will also include securities offered to the public outside of Israel pursuant to a public offering document.
2. As proposed for the Securities Law, here, too the ISA wants to add the definition of “digital assets” and to expand the definition of a “financial instrument” to also include digital assets. This imposes the obligation to obtain a license for investment advice, marketing, and management for digital assets.
3. In the event adjustments to the law’s provisions are necessary due to the nature of the securities or financial assets, the ISA is seeking authorization to prescribe additional provisions or issue exemptions from the law’s provisions.

Proposed amendments to the Joint Investment Trust Law:

1. The ISA is proposing to apply the Joint Investments Law also to joint investments in digital assets.
2. The ISA is seeking to expand its authority pursuant to section 97(b) to also include joint investments in digital assets so that, in the event adjustments to the law’s provisions are necessary, it will be able to prescribe additional provisions or to issue exemptions from the law’s provisions.

These proposed amendments are basically attempting to close loopholes, whether real or imagined, in the current situation regarding digital assets. The proposed amendments expand the definition of “securities” and add “digital assets” to the definition of a “financial instrument.” Similar to one of the components in the definition given by the Howey Test for investment agreements, which considers the “expectation of profits,” the ISA is adding a subjective test of the “purpose of the investment.” This component is subjective by nature and examines the expectations of the buyer, instead of focusing on the objective characteristics of a digital asset. Thus, the purchase of a unique NFT token or utility token, stemming from a buyer’s speculative considerations, without the creator of the digital asset having such an intention, will turn the digital asset into a security or financial instrument, with all the implications this entails.

It appears the proposed amendment to Israel’s securities laws is primarily an attempt to contend with the risks involved in investing in digital assets, in order to protect the investing public. However, it leaves no room for flexibility, apart from a vague promise to expand the ISA’s authority so it can “make adjustments,” since it places almost the entire crypto world under the definition of a “security.” Compared to the proposed European legislation, Markets in Crypto-Assets, containing hundreds of pages, this amendment does not seem to provide any good news for crypto ventures operating in Israel.

The Israel Securities Authority is inviting the public to submit comments about the proposed amendment until February 12, 2023.

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Barnea Jaffa Lande’s Capital Markets Department is at your service if you need advice in relation to the ISA’s proposals and their implications.

Adv. Andrey Yanai is a partner in the firm’s Capital Markets Department.

Adv. Avihai Tal is an associate in the department.