Republican Reps. ask Gensler for clarity on how securities laws apply to airdrops

Two Republican Congressional Representatives are demanding clarity from the Securities and Exchange Commission about how regulators view airdrops. 

Reps. Tom Emmer and Patrick McHenry penned a letter to SEC Chair Gary Gensler Tuesday, expressing concern that regulators have “misapplied” securities laws to airdrops, a technology, they say, that plays a “crucial role in the development of a decentralized blockchain system.” 

Airdrops, which Emmer and McHenry define as digital assets that are distributed to early users of certain protocols, have, like many parts of the crypto industry, been in a regulatory gray area in recent years. 

In a 2018 enforcement action against Tomahawk Exploration’s initial coin offering (ICO), the SEC claimed even tokens distributed for “free,” like airdrops, are securities because they create a public trading market. Airdrops are normally given to early community members or others who perform menial tasks (such as downloading an app or promoting a project), the SEC added, but even so, there does not need to be a transfer of money to constitute a “sale.”  

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It’s a similar argument to the ones securities regulators made in the 1990s during the dot-com craze with “free stock” enforcement actions, attorneys at Hunton Andrews Kurth wrote in a blog post. 

“In what have become known as the ‘free stock’ cases, investors were typically required to sign up with issuers’ websites and disclose personal information in order to obtain the ‘free’ shares,” the post reads. “The SEC likewise took the position that the issuers received value (and did not make a gift) by creating a public market for their shares, increasing their business prospects, creating publicity, increasing traffic to their websites and generating possible interest in future public offerings.

Crypto advocacy group the DeFi Education Fund sued the SEC earlier this year alongside Texas-based clothing company Beba Collective in an effort to get a court ruling confirming Beba’s airdropped token was not a security. The case was eventually dismissed, however, as the judge ruled that the parties could not sue the SEC without challenging a specific rule or enforcement action against the parties, which did not exist. 

Read more: DeFi Education Fund seeks FOIA amid SEC inaction on securities dispute

In their Tuesday letter, Emmer and McHenry ask securities regulators to explain if airdrops constitute securities under the Howey test. They also ask why airdrops should be treated any differently from other rewards programs companies routinely engage in, like airline miles or credit card points, which are often gifted. 

The Reps. ask that Gensler respond to their inquiries by Sept. 30. 

The letter comes a week before the House Financial Services Committee is set to hear from SEC Commissioners during an oversight hearing scheduled for Sept. 24. McHenry, who is not running for re-election this November, chairs the committee, of which Emmer is a member.

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