The altcoin topic everyone wants to sweep under the rug

[TPTB_need_war]

I argue if the developers continue with a community that is promoting to investors such that the coins are arguably illegal, then the developers need to quit or potentially be participating in an illegal common enterprise.

 
  
What, in your opinion, would be the difference between two PoW currencies from your legal perspective:  One is mined fairly for only a single day, which highly pre-announced, but nevertheless completely mined out in a single day.  It exists as a strict Bitcoin clone with no future development intended.  
  
Contrast this with an experimental new blockchain with many new features initially mined out over a period of years, such as Monero.  
  
If I got online and said, "Coin A is amazing!  It's going to be huge!  Everyone should buy it!" then would I be liable under your interpretation of the rules (even though I don't agree with you?)  There is no active development, and no community to speak of.  There are no insiders.  There is only the many people who mined it over a single day, and now hold it for whatever reasons they are holding/selling it.  If that wouldn't be illegal,

If that promoter is able to create reasonable expectations of investment gains, then he could be considered the security for the investors expectations and thus yes it could be illegal if unregistered and sold to the general public, and that promoter could be culpable if the expectations were predominately due to his promotions and efforts.

I mean how much more simple can it be? The securities law is designed to protect naive investors with proper disclosure. Culpability is for those who attempt to circumvent that purpose of the law by any means.

then there is no way you can argue that Coin B, with active development and a longer distribution could ever be considered illegal.

You keep trying to wiggle away from central finding of the Howey test, by inserting irrelevant tangential circumstances. Please re-read my prior post which was a reply to kazuki49.

Those actions you cite could be considered some proof of targeting users, but that would need to be preponderance of what is going on and real testers, ecosystem developers, and users forming those who are purchasing tokens. If instead the community are clearly investors and speculators (which is so obviously clear for Monero and Aeon and most every other altcoin if not all), then the fact that the developers have a long-term focus to improve the code and spreading the issuance out over a longer period is irrelevant to the preponderance of the fact that investors are buying with reasonable expectations of gain.

The court will look at the reality, not some ideological arguments that attempt to obfuscate reality.

  

Contributing to an open source project doesn't automatically take something that was legal, and make it illegal.  See how your train of thought produces a logical fallacy?

That is not logic because it a non-inclusive logic. For example, not contributing to an open source project doesn't automatically take something that was illegal, and make it legal. Mentioning either of those statements is irrelevant to what fulfills the Howey test.

Sorry you are constructing strawman after strawman hoping that your entire thesis of investing in altcoins won't come crashing down. Reality is hard to swallow.

Be very careful with arguing logic with an expert programmer. Logic is our bread and butter.

[americanpegasus]

Your arguments amount to the equivalent of, "the internet is illegal unless it is used by all participants to share some form of meaningful video.  This new network between universities you are constructing is probably going to be declared illegal."  
  
The utility and applications for the network (and in this case the economy) can only come after a successful speculatory phase.  
  
No one chooses to be the 30th, or 100th, or even 2,000th person to buy into a cryptocurrency because they are excited about all the places they can spend it.  You are smart, surely you understand the necessary tiers that a money arising from 'nothing' must undergo: the first such phase is successful speculation backed by the promise of the technology and the possibility that others will also adopt it.  
  
Only once a significant number of people hold the currency can meaningful transactions occur and a functioning economy emerge.  To expect all participants to buy a brand new cryptocurrency solely to participate in its non-existent economy is absurd.  To expect that people getting involved in an open source financial project are all criminals is equally absurd.  This would mean that everyone who 'hyped' bitcoin back in 2010 and 2011 are also criminals.  It would also make theymos a criminal for even having a Bitcoin speculation board on these forums, which has not and will not happen. 
  
Since people like Vorhees have already been thoroughly dealt with by the government, it is safe to assume they will not (and cannot) go back now and say "Actually everything you did was illegal, and instead of just paying taxes on it, you are being prosecuted".  This will never, ever happen.  
  
And since it wasn't illegal in the early days of bitcoin, it's not illegal now.  Cryptocurrencies are not securities; the SEC and the US Government have established that again and again through both precedent and release.  Any change to this now would likely go to the Supreme Court and be struck down due to 6 years of existing precedents not only set by US citizens but by other nations as well.  It would be an astronomically unlikely and thoroughly tyrannical act to begin prosecuting early holders of alt-coins (especially PoW ones) and the consequences for US Reputation (who is trying to be seen as an international advocate for cryptocurrency, actually) would be disastrous.  
  
Never happen, and I consider the matter closed in my mind.

[TPTB_need_war]

Can I ask your opinion, does the incoming Friday ruling of SEC change your observation about crypto securities, what is illegal and what isn't?

http://www.cnbc.com/2015/10/29/mom-and-pop-crowdfunding-for-startups-is-about-to-become-a-reality.html

Afaik no. To comply with the Jobs act afaik you must register and I believe there are requirements on investors such as 1 year hold periods. It may be another way to do a crypto ICO that is clearly legal, but it will come with some downsides in terms of hold period, filing reports, and admitting clear culpability for disclosure. But I need to study more on the details before I can say with 100% confidence.

So might be an improved option, but probably won't change my interpretation for those who are not using this new option.

[TPTB_need_war]

Your arguments amount to the equivalent of, "the internet is illegal unless it is used by all participants to share some form of meaningful video.  This new network between universities you are constructing is probably going to be declared illegal."

Please man. You are just wasting our time. You clearly have a bias because you aren't making any sense. I don't have time to repeat the same logic over and over. You are being redundant.

Your strawman analogy example does not create shares of a common enterprise which people can buy.

No one chooses to be the 30th, or 100th, or even 2,000th person to buy into a cryptocurrency because they are excited about all the places they can spend it.  You are smart, surely you understand the necessary tiers that a money arising from 'nothing' must undergo: the first such phase is successful speculation backed by the promise of the technology and the possibility that others will also adopt it.

Disagree. The speculation can be in the ecosystem (new ventures), where it should probably be so it is decentralized and creating network effects and not dumping the speculation into the nascent open source Inverse Commons where it puts the entire fledgling ecosystem at risk. After the Inverse Commons (the coin) becomes mature then everyone can speculate as they do for Bitcoin. If some nascent adopters decided to hold their tokens for the long-term, well maybe they will buy a condo instead of pizza, but if most of them are thinking that way then we are not in the early days of Bitcoin where people were focused on users and developing the ecosystem.

This is precisely what I will do different than the other altcoins before me. The key is to build the platform for the ecosystem. And yet you wonder why I don't want to join those projects which have demonstrated to me they don't have a clue about marketing nor shipping software to 3 million users (inflation-adjusted) as I did.

 
Only once a significant number of people hold the currency can meaningful transactions occur and a functioning economy emerge.  To expect all participants to buy a brand new cryptocurrency solely to participate in its non-existent economy is absurd.  To expect that people getting involved in an open source financial project are all criminals is equally absurd.  This would mean that everyone who 'hyped' bitcoin back in 2010 and 2011 are also criminals.  It would also make theymos a criminal for even having a Bitcoin speculation board on these forums, which has not and will not happen.

Observe me over the next year.

 
Since people like Vorhees have already been thoroughly dealt with by the government, it is safe to assume they will not (and cannot) go back now and say "Actually everything you did was illegal, and instead of just paying taxes on it, you are being prosecuted".  This will never, ever happen.

He settled by paying back all the money and getting a plea bargain. Everything he did was illegal. And do it again, they SEC will come after you.

I consider the matter closed in my mind.

Good. I don't need to convince you. You are grown up. You've been duly warned.

[americanpegasus]

Disagree. The speculation can be in the ecosystem (new ventures), where it should probably be so it is decentralized and creating network effects and not dumping the speculation into the nascent open source Inverse Commons where it puts the entire fledgling ecosystem at risk.

 
  
No one spends hard assets to be part of some charitable science project.  At least, not many people do.  To function in its intended way, a cryptocurrency *must* carry financial value; there is no other way.  To carry financial value humans must be allowed to speculate on its future value, especially considering that network effects are exponential.  It is silly to think that thousands of initial adopters will all put hard-earned financial value into a cryptocurrency and then unanimously agree: "We sure hope the value doesn't go up!"  
  
Of course the value will go up, along with the hash rate, due to the technology and applications.  All three are linked.  They are not separate entities.  
  
The very reason I am so bullish on Monero is I see that it's features (I won't shill here, but you are well familiar with them) permit the first actual instance of digital cash in the world, as well as several social contracts that have never been possible before.  
  
This is in stark contrast to many other shitcoins where "the value will go up because we will get more people to use it and the value will go up!  moon!".  But even though this was the case with some currencies like Dogecoin, it has still escaped scrutiny by the SEC, despite being less defensible than what Monero and Aeon are doing.  
  

Observe me over the next year.

 
  
And I'll use it to buy a copy of my best selling book.  Talk is cheap, and provides too easy of a dopamine blast.  Actions matter - good luck.  
  

He settled by paying back all the money and getting a plea bargain. Everything he did was illegal. And do it again, they SEC will come after you.

 
  
From running an illegal dice site, not for anything to do with the actual currency of bitcoin.  No one minded that he was using bitcoin or promoting it.  They minded he profited handsomely off a gambling operation.  
  
I have no plans to support or profit off any gambling operations.   
 
You should really lock yourself away in that cave we talked about.  Technically, by getting you to waste your time arguing with me (and the other Monero supporters) we delay this amazing cryptocurrency of yours.  The more we delay it, the less theoretical competition we have.  Therefore, continuing this argument is literally increasing the future value of Monero and is of no value to you.  Sometimes it can be a huge advantage to have less valuable time than the other guy (even though my time is valuable as well  ). 

[TPTB_need_war]

No one spends hard assets to be part of some charitable science project.  At least, not many people do.  To function in its intended way, a cryptocurrency *must* carry financial value; there is no other way.  To carry financial value humans must be allowed to speculate on its future value, especially considering that network effects are exponential.  It is silly to think that thousands of initial adopters will all put hard-earned financial value into a cryptocurrency and then unanimously agree: "We sure hope the value doesn't go up!"

And you think there is only one way to adopt a coin and this is why your investments are going no where. Investors don't become users. Duh.

I guess if all you have is a hammer, everything looks like a nail.

This is in stark contrast to many other shitcoins where "the value will go up because we will get more people to use it and the value will go up!  moon!".  But even though this was the case with some currencies like Dogecoin, it has still escaped scrutiny by the SEC, despite being less defensible than what Monero and Aeon are doing.

You all think so highly of yourselves and call everything else a shitcoin, but this is just your foolish pride all being in lockstep ready to lose your money together like good socialists in the end game. And your coins are no less culpable, in fact more so because you all are clearly running an investment clique (and it is radically hindering anything you could actually do in the market).
  

He settled by paying back all the money and getting a plea bargain. Everything he did was illegal. And do it again, they SEC will come after you.

 
  
From running an illegal dice site, not for anything to do with the actual currency of bitcoin.

He was selling illegal unregistered securities.

I'm done. This is non-productive for me.

[hashtag101]

Correct me if Im wrong tptb, but I believe he is saying that the way the law is written, and the case he has been referencing, could be used to cause us legal issues in the future.

He has stated a way forward, that we could follow, which would give us greater protection if legal action were brought up.

Who knows what strategy they are planning.

It might be a good idea to take these precautions, considering how evil they can be.

I dont think anyone is saying that it wouldn't be a stretch, but they have the audacity and the resources to pull it off.

I think tptb has presented a way they could crawl up our asses, though unlikely I hope, but definitely possible.

Its just that simple.

[TPTB_need_war]

The following 2001 Appeals Court decision should be more convincing about what I have been warning about Altcoin developers and communities primarily marketing their coins to investors for the purpose of investment gains, thus creating an implied "investment contract" criteria for a security under the durable 1946 SEC vs. Howey Supreme Court test.

Note tokens distributed via mining are still a form of "specific consideration in return for a separable financial interest" because one has to invest in mining (for PoW) and shares (PoS) in order to participate in mining:

http://lawbitrage.typepad.com/blog/2014/11/cryptoequity-regulation.html

Under Howey, it doesn't matter whether the investment capital comes in the form of legal tender, digital currency, or some other valuable asset. Bitcoin ponzi schemer Trendon Shavers found that out the hard way.

The Howey test must be understood to be extremely general:

https://scholar.google.com/scholar_case?case=12097435876434110828&hl=en&as_sdt=6,33

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellant,
v.
SG LTD. et al., Defendants, Appellees.

Nos. 01-1176, 01-1332.
United States Court of Appeals, First Circuit.

Heard August 2, 2001.
Decided September 13, 2001.

Relying upon a dictum from Howey discussing "the many types of instruments that in our commercial world fall within the ordinary concept of a security,", the district court drew a distinction between what it termed "commercial dealings" and what it termed "games." Characterizing purchases of the privileged company's shares as a "clearly marked and defined game," the court concluded that since that activity was not part of the commercial world, it fell beyond the jurisdictional reach of the federal securities laws. Id. In so ruling, the court differentiated SG's operations from a classic Ponzi or pyramid scheme on the ground that those types of chicanery involved commercial dealings within a business context. Id.

We do not gainsay the obvious correctness of the district court's observation that investment contracts lie within the commercial world. Contrary to the district court's view, however, this locution does not translate into a dichotomy between business dealings, on the one hand, and games, on the other hand, as a failsafe way for determining whether a particular financial arrangement should (or should not) be characterized as an investment contract. Howey remains the touchstone for ascertaining whether an investment contract exists — and the test that it prescribes must be administered without regard to nomenclature.

A fairly recent Supreme Court opinion demonstrates that the "commercial world" to which the Howey Court alluded actually encompasses the total universe of financial instruments available to investors, rather than the subset of financial instruments envisioned by the district court (i.e., "commerce" as opposed to "games"). In that case, Justice Marshall wrote:

In defining the scope of the market that it wished to regulate, Congress painted with a broad brush. It recognized the virtually limitless scope of human ingenuity, especially in the creation of "countless and variable schemes devised by those who seek the use of the money of others on the promise of profits," and determined that the best way to achieve its goal of protecting investors was "to define `the term "security" in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security.'" Congress therefore did not attempt precisely to cabin the scope of the Securities Acts. Rather, it enacted a definition of "security" sufficiently broad to encompass virtually any instrument that might be sold as an investment.

The Howey Court established a tripartite test to determine whether a particular financial instrument constitutes an investment contract (and, hence, a security). This test has proven durable.

substance governs form, and the substance of an investment contract is a security-like interest in a "common enterprise" that, through the efforts of the promoter or others, is expected to generate profits for the security holder, either for direct distribution or as an increase in the value of the investment.

The Supreme Court has long espoused a broad construction of what constitutes an investment contract, aspiring "to afford the investing public a full measure of protection." The investment contract taxonomy thus "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits."

The Howey test has proven to be versatile in practice. Over time, courts have classified as investment contracts a kaleidoscopic assortment of pecuniary arrangements that defy categorization in conventional financial terms, yet nonetheless satisfy the Howey Court's three criteria.

A. Investment of Money.

The first component of the Howey test focuses on the investment of money. The determining factor is whether an investor "chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security."

B. Common Enterprise.

The second component of the Howey test involves the existence of a common enterprise. Before diving headlong into the sea of facts, we must dispel the miasma that surrounds the appropriate legal standard.

1. The Legal Standard. Courts are in some disarray as to the legal rules associated with the ascertainment of a common enterprise. See generally II Louis Loss & Joel Seligman, Securities Regulation 989-97 (3d ed. rev.1999). Many courts require a showing of horizontal commonality — a type of commonality that involves the pooling of assets from multiple investors so that all share in the profits and risks of the enterprise.

Other courts have modeled the concept of common enterprise around fact patterns in which an investor's fortunes are tied to the promoter's success rather than to the fortunes of his or her fellow investors. This doctrine, known as vertical commonality, has two variants. Broad vertical commonality requires that the well-being of all investors be dependent upon the promoter's expertise.

In contrast, narrow vertical commonality requires that the investors' fortunes be "interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties."

We hold that a showing of horizontal commonality — the pooling of assets from multiple investors in such a manner that all share in the profits and risks of the enterprise — satisfies the [Howey] test. Adopting this rule also aligns us with the majority view and confirms the intimation of Rodriguez. Last, but surely not least, the horizontal commonality standard places easily ascertainable and predictable limits on the types of financial instruments that will qualify as securities.

C. Expectation of Profits Solely From the Efforts of Others.

The final component of the Howey test — the expectation of profits solely from the efforts of others — is itself divisible. We address each sub-element separately.

1. Expectation of Profits. The Supreme Court has recognized an expectation of profits in two situations, namely, (1) capital appreciation from the original investment, and (2) participation in earnings resulting from the use of investors' funds. These situations are to be contrasted with transactions in which an individual purchases a commodity for personal use or consumption. The SEC posits that SG's guarantees created a reasonable expectancy of profit from investments in the privileged company, whereas SG maintains that participants paid money not to make money, but, rather, to acquire an entertainment commodity for personal consumption.

In Forman, apartment dwellers who desired to reside in a New York City cooperative were required to buy shares of stock in the nonprofit cooperative housing corporation that owned and operated the complex. Based on its determination that "investors were attracted solely by the prospect of acquiring a place to live, and not by financial returns on their investments," the Forman Court held that the cooperative housing arrangement did not qualify as a security under either the "stock" or "investment contract" rubrics. The Court's conclusion rested in large part upon an Information Bulletin distributed to prospective residents which stressed the nonprofit nature of the cooperative housing endeavor.

We think it noteworthy that the Forman Court contrasted the case before it with Joiner. In that case, economic inducements made by promoters in conjunction with the assignment of oil well leases transformed the financial instrument under consideration from a naked leasehold right to an investment contract. The Joiner Court found dispositive advertising literature circulated by the promoters which emphasized the benefits to be reaped from the exploratory drilling of a test well. Id. ("Had the offer mailed by defendants omitted the economic inducements of the proposed and promised exploration well, it would have been a quite different proposition.").

The way in which these cases fit together is instructive. In Forman, the apartment was the principal attraction for prospective buyers, the purchase of shares was merely incidental, and the combination of the two did not add up to an investment contract. In Joiner, the prospect of exploratory drilling gave the investments "most of their value and all of their lure," the leasehold interests themselves were no more than an incidental consideration in the transaction, and the combination of the two added up to an investment contract.

Seen in this light, SG's persistent representations of substantial pecuniary gains for privileged company shareholders distinguish its StockGeneration website from the Information Bulletin circulated to prospective purchasers in Forman. While SG's use of gaming language is roughly analogous to the cooperative's emphasis on the nonprofit nature of the housing endeavor, SG made additional representations on its website that played upon greed and fueled expectations of profit.

This is not to say that SG's gaming language and repeated disclaimers are irrelevant. SG has a plausible argument, forcefully advanced by able counsel, that no participant in his or her right mind should have expected guaranteed profits from purchases of privileged company shares. But this argument, though plausible, is not inevitable. In the end, it merely gives rise to an issue of fact (or, perhaps, multiple issues of fact) regarding whether SG's representations satisfy Howey's expectation-of-profit requirement.

2. Solely from the Efforts of Others. We turn now to the question of whether the expected profits can be said to result solely from the efforts of others. The courts of appeals have been unanimous in declining to give literal meaning to the word "solely" in this context, instead holding the requirement satisfied as long as "the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." This liberal interpretation of the requirement seemingly comports with the Supreme Court's restatement of the Howey test. (explaining that "the touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others").

We need not reach the issue of whether a lesser degree of control by a promoter or third party suffices to give rise to an investment contract because SG's alleged scheme meets the literal definition of "solely." According to the SEC's allegations, SG represented to its customers the lack of investor effort required to make guaranteed profits on purchases of the privileged company's shares, noting, for example, that "playing with [the] privileged shares practically requires no time at all." SG was responsible for all the important efforts that undergirded the 10% guaranteed monthly return. As the sole proprietor of the StockGeneration website, SG enjoyed direct operational control over all aspects of the virtual stock exchange. And SG's marketing efforts generated direct capital investment and commissions on the transactions (which it pledged to earmark to support the privileged company's shares).

[TPTB_need_war]

Below I explain in detail why I think there are only two ways crypto-tokens are not investment securities:

• All the tokens are obtained for free, or essentially free when they issued. To correspond with how restricted securities normally become unrestricted without reporting under some exemptions, ideally 6 months to a year should have transpired before these tokens are significantly resold to the public for consideration greater than significantly no cost, so that it can't be argued there was a transfer gimmick obfuscating the actual economic substance; or
• The tokens are primarily obtained for use cases and/or for furthering the Inverse Commons that is the platform, and not any significant expectation of appreciation of value of the tokens.

Bitcoin had the best model to be honest. It got launched, everyone was free to access the software and start mining. Sure, the creator mined some, but who in hell would know that they would be worth anything? It was worth 0 back then. That's the main difference. Never will be the same post-Bitcoin. The scenario cannot be recreated. Now everyone is looking for "that coin". When people was back in the day playing with Bitcoin, they did it out of curiosity. The early investors mined and bought something that was basically worthless. They deserve a lot more Bitcoin than a guy that comes years later when it's stablished and very promising technology.

I thus argue that Bitcoin significantly avoids being an investment security. There is a bit of concern around newly created tokens since Bitcoin became an investment speculation, but classifying only some of Bitcoin's tokens as securities would destroy fungibility and the tokens may be quite tangled by now. It appears Bitcoin is too large of a phenomenon now for the government to attack it on such dubious technicalities, as a popular outrage would likely ensue.

I argue that most if not all Altcoins have failed to achieve the above two exceptions and thus are illegal unregisted investment securities. Whether you buy or sell them is dependent on your appraisal of risk, timing, and whether you think they will still appreciate in value regardless. In particular I would tend to avoid Altcoins which have had prominent community members spouting off about the size of their HODLings, their "holding forever" pledges, their "only buyers, no sellers", "buy the dip", and other forms of inciting an expectation of appreciation of value. IANAL so readers should consult their own attorney.

So considering the three Supreme Court Howey test criteria explained in detail in my prior post:

A. Investment of money
B. Common enterprise
C. Expectation of profits "significantly" due to efforts of others.

A. Investment of money

Nearly all crypto-tokens today require an investment of money, except perhaps for Dogecoin if the mined coins were donated away and certainly for those who mined in the early days of Bitcoin where you could obtain coins just by letting a miner run in the idle cycles of your laptop with inappreciable electrical cost. The only chance a new altcoin could have to avoid this specific criteria of the Howey test would be either give away all the tokens for no "specific consideration" that is an appreciable cost cost for the recipient. If all the users were able to obtain all the tokens they needed for the typical use case via mining on their home computer with idle cycle and inappreciable electric cost, then there would not be any investment of money. This is because the investor must be capable of sustaining a loss in order for an financial instrument to classified as a security:

https://scholar.google.com/scholar_case?case=4524095741732962732&hl=en&as_sdt=6,33&as_vis=1&kqfp=10330650611816444522&kql=132&kqpfp=14710406364156655404#kq

An "investment of money" under Howey means the investor must have committed his assets to the enterprise in such a manner as to subject himself to financial loss. SEC v. Pinckney, 923 F.Supp. 76, 80 (E.D.N.C.1996).

B. Common enterprise

All crypto-tokens where the tokens have been otherwise classified as securities via the Howey test, are also common enterprises due the least restrictive horizontal commonality test, because all participants' gains on their token values are common since tokens are fungible. There does not appear to be any way for any crypto-token to avoid this criteria of the Howey test.

The following is an erroneous argument (from a law professor!) because the horizontal commonality violated—by the orthogonality of the success of the platform(s), applications that use tokens, and the appreciation of value of the tokens themselves—hinges on the violation of the third criteria "C. Expectation of profits "significantly" due to efforts of others". Meaning that if all those obtaining tokens are interested primarily only in the platform and value created from applications that use the tokens, and not significantly from any appreciation of value of the tokens themselves, then the third criteria is not fulfilled thus being irrelevant that then the horizontal commonality is also lost:

http://lawbitrage.typepad.com/blog/2014/11/cryptoequity-regulation.html

Cryptoequity may not meet the common enterprise requirement, either. Courts have interpreted a common enterprise to exist when an investor's gain is tied directly to the success of the promoter (or a third party), or at least generally dependent on the promoter's efforts. Applying this "vertical commonality" requirement to cryptoequities, however, indicates they are not securities due to the potentially massive gap between the success of a platform (i.e., the promoter) and an individual token holder.

Individual developers and entrepreneurs may fail using an otherwise successful platform. The converse may be true as well. Tokens may be interoperable so that holders can use them on multiple platforms, or export their underlying applications or projects to other platforms. The fact that Ethereum's platform was recreated on the Bitcoin platform suggests that very little intrinsic relationship exists between the success of a token holder and any particular platform, and certainly not something like a passive investor's relationship to a single company's management. And depending on how they develop their applications, individual token holders may find their purchase to be worthwhile or a waste of money. This potentially different payoff undermines the common enterprise in the "horizontal" sense (i.e., among token holders).

C. Expectation of profits "significantly" due to efforts of others.

When tokens are created and issued (whether it be an ICO or tokens created+assigned during mining), if they are acquired primarily for investment and not primarily for use (in what ever ways a token can be used other than for holding for appreciation of value), then there is an expectation of profits due to appreciation of value.

The fact that no investor is in control of the decentralized collective "common enterprise" qualifies for the "due to efforts of others" clause of this criteria of the Howey test:

https://scholar.google.com/scholar_case?case=4524095741732962732&hl=en&as_sdt=6,33&as_vis=1&kqfp=10330650611816444522&kql=132&kqpfp=14710406364156655404#kq

investment contracts may be found where the investor has duties that are nominal and insignificant or where the investor lacks any real control over the operation of the enterprise

So the only way a crypto-token can potentially avoid qualifying for this criteria is for there to be no expectation of profits, either because the tokens are never obtained for investment or always the primarily consideration is the use value and not the appreciation of value. As documented in my prior post and here in another example, if the primary consideration is the use value, then there is no expectation of value appreciation:

http://law.justia.com/cases/oregon/court-of-appeals/1975/535-p-2d-109-2.html

Jet Set is a nonprofit corporation, organized under the laws of Washington in 1970 for the purpose of owning and operating an airplane in order to provide vacation travel for its members. The club scheduled flights to fixed destinations. Members were permitted to reserve space on any flight on a first-come, first-served basis; however, scheduled flights were often canceled if there were insufficient reservations. Members, in addition to membership fees, paid approximately one-half the cost of commercial airline fares for their flights. Flights were limited to particular dates and destinations. Membership also included participation in certain social activities sponsored by the club, including parties, ground accommodation packages and social activities at some destinations. Memberships in Jet Set were transferable.

After Jet Set was incorporated in 1970 "select memberships" were sold for a price of $1,000. The proceeds from the sale of these memberships were placed in escrow until Jet Set secured the use of an airplane. Approximately $70,000 was raised from the sale of these memberships, which were lifetime and nontransferable in nature, and entitled the holder to fly on any Jet Set flight for $20. These memberships were also subject to monthly dues.

One might argue that proof-of-work miners sell tokens for profit margins (not gains) and thus the tokens are not initially obtained for investment. But I think the court has made it clear that no obfuscation gimicks will outweigh the actual economic substance, which is that miners are essentially issuers who transfer the created tokens to recipients in exchange for specific consideration and if those recipients are obtaining them with an expectation of appreciation of value, then this Howey criteria is fulfilled.

The following correct argument (from a law professor) is basically stating that if the primary reason for obtaining tokens is for use cases and/or developing an Inverse Commons ("the platform") and not significantly for appreciation of the tokens' value, then there is no expectation of profit due predominantly from the efforts of others, but rather an expectation of benefits of a common ecosystem. The key is that all those obtaining the tokens must have this expectation. In the case of Ethereum, it is obvious that buyers of their ICO were expecting gains from appreciation which meant they were depending on the efforts of others. That can be probably be documented from threads in this forum Bitcointalk.org.

http://lawbitrage.typepad.com/blog/2014/11/cryptoequity-regulation.html

Likewise, what cryptoequity holders actually purchase with their funds may undermine the sale from being classified as a securities offering. The expectation of profits requirement does not exist when a buyer receives a good, service, or property. This is why crowdfunding platforms like Kickstarter are not subject to federal regulation. It is also why courts, including the U.S. Supreme Court, hold that shares in housing cooperatives or condos are not securities, even when they come with a reduction in rent or income from renting common areas. If cryptoequity is viewed as conferring a right to use "real estate" on a ledger, then, like housing shares, they may not qualify as regulated agreements.
The active involvement of cryptoequity holders--either as developers or entrepreneurs--may limit the applicability of federal law as well. Passive parties that rely on managers to generate a profit are the hallmark of securities investors. On the opposite extreme are partners that equally manage a business: the law presumes that partnership interests are not securities. This is because a partner, as opposed to a mere investor, does not rely on the efforts of others and does not need to be protected by the securities laws in doing so. (The same approach applies to LLCs managed by its members.) Buyers of Ethereum's tokens may be viewed as active participants because they promised their purchase was to use and develop on its software platform (and not as an investment). According to Howey, a purchase motivated to actively "develop" property is not a securities investment.

The following argument (by the same law professor) is a contrived, nonsense (loony), conflation of orthogonal categories (i.e. an ontological or category error). Too often I find people commit these sort of errors of logic. The Supreme Court decided that investments are not securities when they are notes paying an interest rate which were backed by commercial interests and thus not tied to the appreciation of value due to the efforts of others in an enterprise. Crypto-tokens do not pay an interest rate and their return on investment is not primarily due to facilitating short-term cash flow from commercial interests. Although it is true that crypto-tokens may be utilized in some cases for facilitating commercial interests, these are not the only thing backing the return on investment for those who hold the tokens.

http://lawbitrage.typepad.com/blog/2014/11/cryptoequity-regulation.html

Finally, based on the 1990 Supreme Court case of Reves v. Ernst & Young, cryptoequities may not be regulated because they closely resemble commercial contracts that are obviously not securities. The Reves court held that promissory notes secured by home mortgages or business assets were obviously not securities, and neither were agreements that resembled them. The commercial nature of cryptoequity tokens in providing access to software and fundraising platforms may lead a court to hold the same.

[TPTB_need_war]

Please feel free to vote by clicking this following post. Hopefully this will be my final post on this topic for while (or ever).

I am pretty well convinced that being prominently involved with an Altcoin that primarily exists for investor speculation, is potentially illegal. I will not do it.

I reset the poll and edited it to make it simpler to understand. If you've read my last several posts, then hopefully the poll makes sense.

Please vote again.

I voted for: 2 and 4 are illegal, unregistered "investment securities" as defined by USA securities regulation law.

Again I argue these definitions are useful only until the crypto platform of the tokens becomes a significant ecosystem on the order of where Bitcoin is now, after which point I think it is futile for the government to go against the popular activity on the technicality (pretense) of protecting the investor. In my opinion, the main risk is to small Altcoin communities that die leaving huge losses for investors. Prominent people involved with such failed crypto platforms might find themselves in legal trouble.

[TPTB_need_war]

Again I argue these definitions are useful only until the crypto platform of the tokens becomes a significant ecosystem on the order of where Bitcoin is now, after which point I think it is futile for the government to go against the popular activity on the technicality (pretense) of protecting the investor. In my opinion, the main risk is to small Altcoin communities that die leaving huge losses for investors. Prominent people involved with such failed crypto platforms might find themselves in legal trouble.

I think as Bitcoin becomes bigger the "invest to get it" step will not be as needed because people will see benefits in getting paid for Bitcoin by services. For example I know a lot of coders doing freelance jobs for Bitcoin which allow them to get payments from anywhere in the world while also remaining anonymous and they trust a legit escrow more than paypal.

When this get bigger a real economy will flourish where people work for Bitcoin instead of having to buy it all the time. I know people who own 100% stacks of Bitcoin which are from jobs (and small extra of sig campaigns).

It might really help if all the coins are anonymous so that downstream graphs for coins issued (or sold) during the period where the coin was predominately an illegal, unregistered investment security can't be identified or traced with block chain analysis. So thus once the platform ecosystem has reached the stage where the SEC can't attack all the coins as being an illegal, unregistered investment securities, then it has lost the ability to attack any of the coins. Note this might not be a defense though for those who want to report their taxable capital gains.

Referring to the currency itself (i.e. even physical cash notes have this property):

anonymous ⊂ fungible
fungible ⇒ anonymous

Bitcoin has no built-in on-chain anonymity. I invented the best on-chain anonymity currently known to exist.

[americanpegasus]

Alright TPTB.  I still don't agree with your SEC law interpretation at all, but you have inspired me to refrain from "Buy this now, it's gonna explode in value later on!" type posts from here on out, engage in better disclosure about my positions with the communities I moderate (pictured below), and to include a disclaimer in my signature underneath every one of my posts.  
  
I still don't feel any of these measures are necessary, but I feel they show honesty and good faith regardless, even if no one ever tries to accuse me of unethical behavior in the future.  
  

[TPTB_need_war]

Haha, your form is slightly altered.

Either you are being facetious, or entirely don't understand. You wouldn't report changes in ownership of non-securities to the SEC. By filing a report to the SEC about Monero, you are asserting that Monero is a security. But since Monero is not registered with the SEC by its issuers and promoters, then it would be illegal if it is deemed to be a security. The Form 4 has nothing to do with the process of registering a security with the SEC.

My reading of the law is that the only way for cryptocurrency to not be a security and thus not be illegal when it is not registered with the SEC, is for the cyptocurrency to be issued entirely to users and no investors. And by the time investors purchase tokens from users, those tokens should have all been clearly issued for users and not investors.

Since none of the cryptocurrencies other than Bitcoin can come close to complying with user-only issuance and distribution, they are all illegal in my opinion.

[americanpegasus]

My reading of the law is that the only way for cryptocurrency to not be a security and thus not be illegal when it is not registered with the SEC, is for the cyptocurrency to be issued entirely to users and no investors. And by the time investors purchase tokens from users, those tokens should have all been clearly issued for users and not investors.

Which makes no sense at all.  There is no line between a user and an investor; it's impossible to draw such a line, because anyone can believe anything they like.  With increased utility in a cryptocurrency comes increased value, due to networking effects. 
 
If you are saying that no other cryptocurrency other than bitcoin can ever be legal, then why are you working on one?  Do you plan to register yours with the SEC or declare to no investors are allowed to buy your coin from an exchange?

[TPTB_need_war]

My reading of the law is that the only way for cryptocurrency to not be a security and thus not be illegal when it is not registered with the SEC, is for the cyptocurrency to be issued entirely to users and no investors. And by the time investors purchase tokens from users, those tokens should have all been clearly issued for users and not investors.

Which makes no sense at all.  There is no line between a user and an investor; it's impossible to draw such a line, because anyone can believe anything they like.

The Howey test clearly states how to make the distinction between users and investors.You have entirely failed to comprehend what I wrote upthread over the past several posts where I detailed the case law. It clearly states that users have no expectation of appreciation in the value between their cost ("consideration") to acquire the tokens and what they are able to obtain in exchange for the tokens later. Investors instead do expect gains and that is why they obtain the tokens. Users obtain the tokens to use them for some need or activity. It is quite easy to prove that the crypto-tokens you are involved with are being predominately obtained by investors who are not using the tokens but rather HODLing them for future gains.

Please do not make me repeat this again. Please go improve your reading comprehension.

With increased utility in a cryptocurrency comes increased value, due to networking effects.

Yes that can be the case, but users do not hold tokens for gains. An apt distinction is the difference between having $500 in your checking account and having $5000 invested in a pink sheet stock. It is quite clear which holding is for use and which is for expectation of investment gains.

Courts are not blind. They can easily discern the actual economics facts.

If you are saying that no other cryptocurrency other than bitcoin can ever be legal, then why are you working on one?

Because I will design my crypto-platform to not issue crypto-tokens to investors.

Do you plan to register yours with the SEC or declare to no investors are allowed to buy your coin from an exchange?

No issuance to investors. No public announcement nor offering will be made to investors. No representations nor promotions will be made to investors. That already suffices to be exempt for the Howey test in my opinion.

There will likely be no exchange for as long as I can prevent one from existing hopefully at least 6 months after coins have been issued to users, although I think this requirement is not strictly necessary since the prior paragraph is sufficient.

If investors on their own accord find ways to trade for coins that were issued to users, per my interpretation that is outside the scope of the Howey test. It is obvious they were not encouraged, promoted, nor even facilitated in having expectations of gain, solely (or predominantly ) from others. They will have proven their expectations rely solely on themselves. And in fact such effort on the part of investors to obtain tokens, becomes a form of use and adds network effects.

Reading the law carefully is important.

[americanpegasus]

 
No issuance to investors. No public announcement nor offering will be made to investors. No representations nor promotions will be made to investors. That already suffices to be exempt for the Howey test in my opinion.

There will likely be no exchange for as long as I can prevent one from existing hopefully at least 6 months after coins have been issued to users, although I think this requirement is not strictly necessary since the prior paragraph is sufficient.

Ok,  ,  . 
 
Just.... please stop.  You're killing me.    
 
You're going to launch your coin and not tell anybody about it and try to avoid people knowing about it!? 
 
I'll tell you right now, removing the speculatory and early-adopter incentives from your coin is going to absolutely destroy any economic velocity it might ever hope to have.  If people are not incentivized to use your currency in increasing numbers, why would they ever start using it at all?  As well, the fact that you are going to make efforts to keep 'a lid' on the launch and creation of your coin is going to absolutely ruin any chance of people later growing interested in your coin (no matter how good the protocol).  By your logic, Bytecoin should be considered the 'true' implementation of Cryptonote since they claim to have had a 'token' for two years before it became public knowledge and people began speculating on it through exchanges.  Nevermind that no one had ever heard about it and 80% of it was mined by the time it was announced. 
 
Rethink your strategy, as well as your legal analysis of the situation.
 

[TPTB_need_war]

You're going to launch your coin and not tell anybody about it and try to avoid [all] people knowing about it!?

I didn't write that.

I'll tell you right now, removing the speculatory and early-adopter incentives from your coin is going to absolutely destroy any economic velocity it might ever hope to have.

Observe and be schooled in marketing.

If people are not incentivized to use your currency in increasing numbers, why would they ever start using it at all?

Investors don't use a currency. I told you that up thread, but now you make me repeat it again. Everything for you looks like a nail, because you've only got a hammer.

As well, the fact that you are going to make efforts to keep 'a lid' on the launch and creation of your coin is going to absolutely ruin any chance of people later growing interested in your coin (no matter how good the protocol).

Actually it is quite the opposite.

By your logic, Bytecoin should be considered the 'true' implementation of Cryptonote since they claim to have had a 'token' for two years before it became public knowledge and people began speculating on it through exchanges.

And ~0 usership.

Rethink your strategy, as well as your legal analysis of the situation.

You need that advice, not me.

[americanpegasus]

To put this topic to bed once and for all, the head of the SEC, Ms. Kara Stein came out today and spoke positively of "blockchain technology".   
 
http://www.coindesk.com/sec-commissioner-kara-stein-blockchain-technology/

[TPTB_need_war]

To put this topic to bed once and for all, the head of the SEC, Ms. Kara Stein came out today and spoke positively of "blockchain technology".   
 
http://www.coindesk.com/sec-commissioner-kara-stein-blockchain-technology/

Nothing and absolutely nothing in her statements absolves culpability under the USA Securities law and Howey test.

You seem to completely misunderstand (and conflate) that statements about the potential of technology speak to nothing about legal implications of the rollout of technologies to investors.

Again I have warned you all that virtually all of the altcoins are ILLEGAL unregistered investment securities and by trading in them, you speculators are potentially setting yourselves up to be culpable, especially those of you who have prominent roles in the community and make statements about speculation.

Proceed at your own peril. And do consult your attorney, because IANAL.

[Fontas.]

Bitshares have made themselves legal in the eyes of the SEC by calling things what they are not.


They must have great lawyers to come up with that.