A quick chat with an attorney who is an SEC specialist basically said "if it breathes" i.e. involves money that ICO is seen as a security. The SEC putting together the digital division which covers cryptocurrency tokens is part of what led to him saying this. Basically fish in a barrel.
It is in my opinion that any US-based ICO is now in a lottery as to whether they get the SEC visit.
Not legal advice at all, just sharing an excerpt from a coffee chat.
I saw your analogy got downvoted because people didn't like it.
But I've talked with prominent lawyers about this distinction and securities laws are flexible enough to include practically any product in their purview.
The Howey Test isn't the only test that courts and regulators have created.
There are several tests floating amongst the states and various federal circuits, which can and have deemed otherwise benign products and services as things that should be registered as securities with the most onerous costs and distinctions.
A California country club's member fees were deemed securities under one framework.
And every kickstarter and centrally issued product can under other frameworks.
There is nothing wrong with your analogy. The securities regulators generally don't try to stifle all commerce so far.
The idea that all ICOs will experience this form of securities discrimination - just for the mere fact they are using cryptographic hashes and get a lot of revenue/capital - is just as logically unsound.
But they could. Just like almost every product or service could. When they do it will quickly evolve securities law towards a more apt framework. Its not about "securities or not" its about consumer and investor protection, and this is currently the tool available.
I agree, many things which could be deemed securities are not. The SEC's mandate is to protect small investors and public faith in investment markets, and they will hopefully focus their power on instruments where that faith is being challenged.
If they do, the best strategy for an organization raising money through an ICO is to use that money in as transparent and ethical a manner as possible.
When you turn PLEX -> USD using official means, can you withdraw that USD from Eve Online? Or can that USD only be spent on subscriptions/in-game items?
If it's the former, Eve Online is at minimum, a money transferrer. If it's the latter, it's just a store that accepts gift cards.
Officially, PLEX can only be redeemed for subscriptions, but it can also be traded as an in game item for ISK (standard in game currency). The only real difference between it and a cryptocoin is that selling PLEX on a secondary market is against the ToS. You will get flagged if you're trading away PLEX ingame for nothing in return, because they assume you're selling it.
> You will get flagged if you're trading away PLEX ingame for nothing in return, because they assume you're selling it.
I'm pretty sure that is enough to avoid it being deemed a security under the SEC's jurisdiction. There needs to be an expectation of future profit. (Not a lawyer.)
First, the Howey Test is the only test from the Supreme Court.
Second, that is a multipronged test, a product/service which wasn't registered as a security but still passes or fails one prong isn't enough to say it is or isn't a security.
THIRD, there are multiple other tests in various federal circuits.
Fourth, there are tests created by states relevant at the state level.
Fifth, most people are just lucky that securities frameworks haven't been applied haphazardly to everything under the sun.
> There needs to be an expectation of future profit.
I hear this statement repeated a lot, but that seems unlikely to be an absolute requirement. That is, even if every instrument sold for future profit is a security, that doesn't mean everything else isn't. Do you have a source for that statement?
> The test of whether there is an "investment contract" under the Securities Act is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others; and, if that test be satisfied, it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.
That decision defines, in that very part you quote, an investment contract (where basically one expects profit directly without working for it) as a security. That is not surprising really, as it is perhaps the most trivial form of it.
But that was not my question. You, and others have also in conversation, stated that has a requirement for something to be legally regarded as a security. That is what seems unlikely to me.
The very decision you quoted starts out with:
> the Securities Act of 1933 defining "security" as including any "investment contract,"
Note the word "including". That A is B does not mean that B is A. There are other forms of securities, and this document alone should not lead anyone to believe that if they only append to their contractual terms that tokens are to be regarded without use or value, that they somehow would not legally be selling securities anymore.
Note, however, that “investment contract” is one of very many things that are securities (see the recursive definition at 15 USC Sec. 77b(A)(1)), so anything that is an investment contract by the Howey test is a security, but so are lots of things that are not investment contracts.
I can second this view, not only at the SEC but also a few attorneys’ general offices around the country. A lot of people see a promotion or Senate seat in bagging (i.e. fining, shutting down and jailing) ICOs and their promoters.
I find it unlikely an ICO conviction would help anyone electorally. Only tiny proportion of voters would even understand what happened. It's not like high profile corruption or murder or something everyone gets.
That's not to say they wouldn't do it to advance themselves internal to the justice system, where that kind of conviction would have forward-looking value.
> I find it unlikely an ICO conviction would help anyone electorally. Only tiny proportion of voters would even understand what happened. It's not like high profile corruption or murder or something everyone gets.
It'd be so easy to spin ICOs as a matter of fraud that's taking advantage of uninformed investors, a Ponzi scheme, or any of the other buzzwords that historically work pretty well in convincing voters of criminal financial activity.
Whether or not you actually view ICOs as any of these things is incidental to whether or not an AG with career ambitions would be able use that rhetoric to gain votes.
> It'd be so easy to spin ICOs as a matter of fraud that's taking advantage of uninformed investors, a Ponzi scheme, or any of the other buzzwords that historically work pretty well in convincing voters of criminal financial activity.
Indeed. The fact that ICO's have generally been fraudulent get rich schemes aids greatly in this "spin" of which you speak.
Even worse. ICOs are based on crypto magic money. Crypto means computers. Computers means Silicon Valley, which is the current go-to elite to hate. I can see a way to spin this politically that could resonate with plenty of the US population.
Given the recent deluge of anti-SV (and anti-tech sphere in general) articles in mass media, I'm not sure about that. People do read and share this stuff.
> I find it unlikely an ICO conviction would help anyone electorally
I've never held elected office. I defer my opinion to those who do. They say ICOs represents a golden trifecta between (a) fraud against moms and pops, (b) complicated financial instruments and (c) Silicon Valley arrogance.
Can you elaborate on what you mean by shutting down? AFAIK, most ICOs are closed off to us citizens already (and for those that are available to us citizens, it requires the investors to be accredited).
What kind of regulation do you think would come? ICOs are already restricted in the us to accredited investors (if i understand correctly). Do you see something beyond this?
The majority of ICOs are not restricted to accredited investors.
There will be penalties for failure to register securities, for failure to meet reporting and other registered securities requirements, and shareholder clawback lawsuits.
and how exactly are they going to enforce these rules? Do you think the SEC is going to zimbabwe, congo or some other backwater country to tell these people to stop issuing ICO lol? The US federal government is not the policeman of the world my friend.
People who are doing ICOs will just move to where they can have their business be successful. If USA/Europe or Asia ban ICOs then all the devs will just move to another country where it is legal, maybe russia?
I haven't been following closely, recently, but literally the first one I checked has no check on residency [0], which is enough to bring it under SEC jurisdiction if the sale goes over other thresholds.[1]
Sales before and after the bulletin are subject to the same laws.
It was totally legal for US residents to participate, as far as I know. I believe almost all the securities-law obligations resulting from the sale are on Tezos. (Not a lawyer.) The only obligation on buyers might be that they can't resell it without being guilty of selling an unregistered security themselves.
A quick chat with an attorney who is an SEC specialist basically said "if it breathes" i.e. involves money that ICO is seen as a security. The SEC putting together the digital division which covers cryptocurrency tokens is part of what led to him saying this. Basically fish in a barrel.
It is in my opinion that any US-based ICO is now in a lottery as to whether they get the SEC visit.
Not legal advice at all, just sharing an excerpt from a coffee chat.