Who is an "Affiliated Person" Under FIT Act of 2023

On July 20th, 2023, the “Financial Innovation and Technology for the 21st Century Act” or FIT for the 21st Century Act was referred to the Committee on Financial Services, and in addition to the Committee on Agriculture.

This FIT Act amends the original definition of the "affiliated person" defined under the Section 2(a) of the Securities Act of 1933 (15 U.S.C. 77b(a)) by adding at the end the following:

(20) AFFILIATED PERSONS.—The term ‘affiliated person’ means a person (including a related person) that—“(A) with respect to a digital asset issuer— “(i) directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such digital asset issuer; and “(ii) was described under clause (i) at any point in the previous 3-month period; or “(B) with respect to any digital asset— “(i) beneficially owns 5 percent or more of the units of such digital asset that are then outstanding; and “(ii) was described under clause (i) at any point in the previous 3-month period.

Here is a simplified explanation of the quoted section above:

Affiliated person means a person who has a certain degree of control or ownership over a digital asset issuer or a digital asset.

Direct or indirect control means that the person has the ability to influence the management or decisions of the digital asset issuer or digital asset. This can be done through ownership of shares, voting rights, or other means.

Beneficial ownership means that the person has a financial interest in the digital asset. This can be done by owning shares, holding a debt instrument, or having another type of financial interest.

The previous 3-month period means that the person must have met the criteria for being an affiliated person at any point in the past 3 months.

In other words, an affiliated person is someone who has a significant influence over a digital asset issuer or digital asset. This definition is important because it determines who is subject to certain regulations under the FIT bill.

Here are some examples of affiliated persons:

• The CEO of a digital asset issuer
• A company that owns 5% or more of the shares of a digital asset issuer
• A person who has a debt instrument that is secured by a digital asset
• A director of a digital asset issuer
• A person who has a close personal or business relationship with a digital asset issuer or its management
• A person who is a beneficiary of a trust that owns digital assets
• A person who is an officer or director of a company that is affiliated with a digital asset issuer

The definition of "affiliated person" is complex and there may be other examples that are not listed here. If you are unsure whether or not you are an affiliated person, you should consult with an attorney.

Here are some additional things to keep in mind about the definition of "affiliated person":

• The definition applies to both natural persons and legal entities.
• The definition is not limited to digital asset issuers. It can also apply to other entities that are involved in the digital asset ecosystem, such as exchanges and custodians.
• The definition is broad and can be interpreted in different ways. This means that it is important to get legal advice if you are unsure whether or not you are an affiliated person.

Now that we understand the definition of "affiliated person" under the FIT for the 21s Century Act, here are The Top 8 key Points To Know About the Concept of "affiliated person" under the FIT for the 21st Century Act:

1) An affiliated person is someone who controls, is controlled by, or is under common control with a covered entity.

• Control can be defined in a number of ways, but it generally means the ability to influence the management or decisions of an entity. This can be done through ownership of voting securities, management control, or contractual arrangements.
• For example, a person who owns a certain percentage of the voting shares of a company would be considered to control that company.
• Similarly, a person who is a director of a company and has the power to appoint or remove other directors would also be considered to control that company.

2) The definition of "affiliated person" is broad and includes a wide range of individuals and entities.

• The affiliated person definition includes individuals, corporations, partnerships, trusts, and other entities.
• It also includes individuals who are acting as agents or representatives of a covered entity or its affiliated persons.
• For example, a person who is a financial advisor and is registered with a covered entity would be considered to be an affiliated person of that entity.

3) The purpose of the affiliated person definition is to prevent conflicts of interest and to protect consumers.

• The affiliated person definition is designed to prevent conflicts of interest between covered entities and their affiliated persons.
• For example, the definition would prevent a covered entity from favoring its affiliated persons when making investment decisions for its customers.
• This is important because conflicts of interest can harm consumers by giving some investors an unfair advantage over others.

4) The affiliated person definition applies to a variety of financial activities, including the provision of financial services, the issuance of securities, and the trading of securities.

• The affiliated person definition applies to a wide range of financial activities.
• This means that the definition can have a significant impact on the way that covered entities conduct their business.
• For example, a covered entity that is issuing securities would need to disclose information about its affiliated persons to investors.

5) The affiliated person definition is important for both covered entities and their affiliated persons.

• Covered entities must carefully consider the affiliated person definition when conducting their business activities.
• Affiliated persons must also comply with the same laws and regulations as covered entities.
• This is important because both covered entities and their affiliated persons can be held liable for violations of the law.

6) The affiliated person definition is complex and difficult to apply.

• The affiliated person definition is complex and can be difficult to apply.
• This is because the definition includes a variety of factors and can be interpreted in different ways.
• For example, it may not be clear whether a person who is a close personal friend of a covered entity's CEO is an affiliated person.

7) There is a significant amount of case law interpreting the affiliated person definition.

• The affiliated person definition has been interpreted by the courts in a number of cases.
• This case law provides guidance on how the definition should be applied in different situations.
• For example, the courts have ruled that a person who is a close personal friend of a covered entity's CEO can be an affiliated person if they have a significant influence over the management of the company.
• The case law is not always clear, and there is still some uncertainty about how the definition should be applied in certain cases.

8) The affiliated person definition is likely to evolve as the financial services industry continues to change.

• The financial services industry is constantly changing.
• As the industry changes, the affiliated person definition may need to be updated to reflect these changes.
• For example, if new types of financial products are developed, the definition may need to be amended to include those products.
• The definition may also need to be updated to reflect changes in the way that financial services are delivered, such as the increasing use of technology.

Summary

In this blog post, we have discussed the definition of "affiliated person" under the FIT bill. We have covered the following key points:

• An affiliated person is someone who controls, is controlled by, or is under common control with a covered entity.
• The definition of "affiliated person" is broad and includes a wide range of individuals and entities.
• The purpose of the affiliated person definition is to prevent conflicts of interest and to protect consumers.
• The affiliated person definition applies to a variety of financial activities, including the provision of financial services, the issuance of securities, and the trading of securities.
• The affiliated person definition is important for both covered entities and their affiliated persons.
• The affiliated person definition is complex and can be difficult to apply.
• There is a significant amount of case law interpreting the affiliated person definition.
• The affiliated person definition is likely to evolve as the financial services industry continues to change.

Here are some examples of affiliated persons:

• A director of a digital asset issuer
• A person who has a close personal or business relationship with a digital asset issuer or its management
• A person who is a beneficiary of a trust that owns digital assets
• A person who is an officer or director of a company that is affiliated with a digital asset issuer

Conclusion

In conclusion, the definition of "affiliated person" is an important concept under the FIT bill. It is important to understand the definition and its implications for both covered entities and their affiliated persons. The definition is complex and can be difficult to apply, but it is important to get legal advice if you are unsure whether or not you are an affiliated person.

For more information, read the H.R.4763 - Financial Innovation and Technology for the 21st Century Act here: https://www.congress.gov/bill/118th-congress/house-bill/4763/text

Disclaimer: While these details align with general legal concepts of affiliated persons, it's important to note that the specific definition and implications of "Affiliated person" under this bill could vary and would need to be verified with the actual text of the bill. This is not legal advise! This is our personal opinion based on the reading and interpretation of this Financial Innovation and Technology for the 21st Century Act.