This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?
> This seems, to me (a layman), to indicate that most any ICO will fall under "security."
Pretty much, yes. Securities are defined very broadly in the US.
Why does it surprise you that these are securities? They very obviously are selling a security to investors, who are purchasing it because they expect the price to increase. Open-and-shut case.
The fact that there's crypto involved is irrelevant.
It really sounds like people are trying to pretend these laws don't apply because they disagree with the laws in question. Which is fine, but let's not pretend like there's any ambiguity here, because there's not. It's extremely clear that almost all ICOs are securities, and if you asked a lawyer I'm 100% sure that's what they would tell you.
A pure payment system within an app. Say that someone builds a social network that lets you easily get in touch with people who have need of skills that you possess. They then introduce a token system - call it "karma", maybe - that you can grant to people who perform good deeds for you, and then if your karma is positive, you can grant it to others in exchange for favors or services. Since you only receive karma for actions you perform and it doesn't rise in value based on the efforts of the social network, it's not a security. It is a currency, however, and could fall afoul of laws governing currencies.
BTW, a number of games successfully have things like this, eg. Linden dollars in Second Life, gold in WoW, or tokens in FarmVille.
> Since you only receive karma for actions you perform
That wouldn't really be an ICO, though, right? You have to be able to convert it back and forth between another currency, not just "earning" it through use of the software to be spent only there and never changing hands.
You could bootstrap initial distribution through an ICO (e.g. if people need an initial stock to be able to distribute it to others). And e.g. in-game currency commonly can be bought, but not sold through official channels.
The SEC Chairman released a statement this morning about cryptos & ICOs. There is a mention of how an ICO can fall outside of the securities designation in the memo.
The Chairman just reiterates what's long been the case in securities law: whether an ICO, like any other instrument, is a security depends on the facts of the case.
If the coin represents ownership of a resource (or a right to a resource), it can be a security (though it might be a derivative instead, governed by a similar but entirely separate set of rules).
Being a security does not mean it can't also be something useful; it just means that the security aspects of it are potentially subject to securities laws.
EDIT: Beanie babies aren't securities because you actually the beanie baby. However, a piece of paper entitling you to ownership of a beanie baby could be a security.
All right, but if the coin is inseparable part of the resource, it cannot be a security. There is a thin line here.
True, but then you're limited to things which can be stored in a blockstream in the space allocated to a single coin. There aren't many useful resources that could fit into that space, even fewer that would scale.
Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)
Unless there is something about Ethereum that I'm not aware of, it does not represent any sort of ownership interest in another asset, it is the asset.
The SEC's position on the DAO was that they were not going to apply their guidance retroactively to that one. Going forward, though, they're cracking down.
> Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)
I didn't see any admission like that. Quite the contrary. I think the statement pretty clearly places the ethereum ICO (as distinct from the functioning network after) as a security.
Which is it? Is it that these tokens aren't really investments, but rather utility instruments people are buying to obtain restaurant reviews? Or is it that it's so unfair that the SEC requires these kinds of companies to register before selling to the public like everyone else? It looks to me like your argument is oscillating a bit.
Well, the exciting part might be that the line between investment and utility instrument is blurring. It seems to me that these two categories needn't be separated by a bright-line.
A particular instrument might blur the lines in terms of how it's packaged and promoted, but the underlying activities aren't blurry at all. People who acquire an asset in the hopes that its price will rise so they can resell it on a secondary market are speculating ("investing"), full stop.
Obviously, this isn't the first time we've had offerings ostensibly taking these forms. People used to buy comic books in the hopes of their appreciation. Ty sold Beanie Babies to people who were stockpiling them for eBay.
The reason Ty didn't get in trouble, but Munchee did, was that Ty was never stupid enough to record videos extolling the once-in-a-lifetime opportunity people had to 9x their investment in restaurant review coupons. Again: a very significant component of the SEC's concern is about marketing and promotion.
Your metaphor doesn't make sense. Are you saying that the token lets me write on it and make toy airplanes? Because if so, then the token wouldn't be regulated...
If you're saying that the piece of paper represents ownership of something, then the paper is most likely a security or derivative, in which case it is already subject to regulation. A token with the same functionality as this piece of paper would be regulated, and vice versa...
I'd counter specifically with Ethereum or Filecoin.
They both represent either computation-time or file-storage-and-bandwidth time.
Ethereum could easily represent time on a distributed AWS Lambda. And FileCoin can represent an AWS S3 storage.
It just so happens that they both are also cryptocoin.
It gets even uglier that the turning-like machine in Ethereum/Solidity also exists, kind of, in Bitcoin. In fact it was because it worked in Bitcoin they developed Ethereum. So technically even Bitcoin can do processing work. Makes everything a bit murkier to be honest.
> Can anyone provide an example where an ICO would not be a security
Well, if it's purely a "utility coin", and people are buying it in order to exchange the coin for some service (like, basically, car wash tokens but on the internet), and there's not really any speculation in the secondary market, and people are buying them for their own use and not to resell or speculate on, it's probably fine. On the other hand, if the product that the coins would be used for hasn't been built yet, it's probably not fine (since you're gambling on the founders executing properly, yet have no real control over whether they do so).
...but no, I don't know of any examples that fit that criteria.
ICOs don't make a lot of sense for things that aren't securities; the most common purpose (at least for the legit, non-fraudulent ones) is to obtain investment to build a product. That's obviously a security, and one of the core purposes of securities law is to protect people being asked to contribute an investment that will be used to build a product.
There’s an assumption being made that the SEC has a vastly different way of looking at investor protection than securities regulators in other jusrisdicions. I’m sure there will be some regulatory arbitrage going on, but if an ICO is a security it doesn’t make it automatically illegal, it just means they have to follow rules established that are mostly there to legally bind the organization to disclose information to investors and follow certain governance standards.
Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.
It wouldn't matter if they're located outside the US. The SEC has jurisdiction over all securities that are sold to US persons, and most countries where you'd want to be located have similar laws.
> Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec.
So they can all run their scams in countries that don't care? I mean, doesn't this just show that crypto startups are all about providing services to entities that, for various reasons, do not / cannot participate in the aboveground economy?
Like, what reputable, real company would have any problem existing inside the USA's jurisdiction? You could argue drug trade, which is supposedly a "victimless crime" (note: it isn't... depending on the drug, even "non-violent" drug use can fuck over a lot of people outside just the person who choses to take said drug (eg: meth, herion, oxy, etc...)). Anything else though, it is almost certainly a scammer scamming people. Why should above ground society tolerate people wanting to run ponzi schemes, people trying to cash out crypto-ransomware revenue, or people who want to deal in murder-for-hire?
I think that EvE Online's market has passed this test. It's not an ICO, but it is an online currency that is purchased with real currency and gets traded on, speculated on, used to buy things, and accepted when selling things. And the key point is that an investor in EvE ISK is at the mercy of CCP for how they inject money into the game.
You can speculate, for example, that pirate faction battleships are about to go up in price. CCP can and does change that all the time. The investor has no insight or control over how ISK is valued.
What keeps it different and unregulated is that it's a one-way conversion. You can buy things with real cash that can be sold for in-game currency. But you cannot, in theory, sell anything inside of the game for real-world cash.
Some people do, of course, but CCP polices this very heavily to avoid exactly this kind of problem.
Virtual game currencies are not that different from Coins. But the main reason they escape scrutiny by regulatory bodies is that they are one-way conversions.
ICOs were, until very recently, one-way conversions. You buy something from someone, good for you. Once it got to a point where it was relatively easy to convert that virtual thing back into legit currency, people started paying attention.
I can't see a way that any new ICOs can dodge this aspect. But there were COs that did dodge it for a while because no one thought they could get big enough to matter.
If RMT got big enough in EvE or any other video game that offers financial incentives to win at the game (so-called pay-to-win) ever got big enough to be able to affect a currency market, they would fall into this scrutiny almost immediately, which is why gaming companies police this so hard.
There isn't really any functional difference between trading game tokens and trading blockchain coins, except that one is easily transferable to real-world currency and the other is not.
So in that very round-about way, any virtual currency that is seen by the FTC to be one-way will not pass the Howey Test. But almost all virtual game currencies can be traded in one way or another for real currency. Most of them can't be done in a large enough scale to affect real currency, so no one cares. Most in-game currencies should fail the test. But they are irrelevant, so they pass.
Interestingly, cash would seem to be a security under this definition. Except it is explicitly exempted:
> The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
From The Securities Exchange Act of 1934 (N.B. IANAL).
So, will cryptocurrencies, possibly including ICOs, be exempted? Only history will tell.
I wonder if you were to declare an intent to establish a new nation in the Antarctic (say by purchasing some of Chile's land) and to fund raise for fees associated with this new nation you offered to sell people dollars of your soon-to-be currency at some fixed price below the expected value, would the SEC disapprove of such an action?
(assuming it was actually done in good faith and not discernibly a scam)
To clarify, yes, this is with the assumption you're actively fundraising in the US. And even if your entity is not based in the US, the question would be for the US related portion of your entity.
