I want to caution you about giving out incorrect legal advice to readers on this forum. You should be more circumspect with your statements.
Maybe not, but they are all securities. And thus are regulated. Whether you like it or not.
The SEC disagrees with you. But perhaps you should reach out to them and help them understand this topic more clearly.
Incorrect. The SEC does not disagree with me.
Where the SEC wrote that some ICOs may be securities (implying that some others may not be), they do not mean that “use value” ICOs (aka “utility tokens”) are exempt. What the SEC means is that any ICO that contains the 3 aspects of the Howey Test is a security:
- Investors in The DAO Invested Money
- With a Reasonable Expectation of Profits
- Derived from the Managerial Efforts of Others
…
The central issue is “whether 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.”
I wrote that if the investors do not have an
expectation that the profit (or gain due to appreciation of the token) will be derived from ongoing managerial efforts of the issuer, then it is not a security. But none of the ICOs are issued that way. They are all issued with the (even implied) promise of some efforts of the development team to lead to some successful token system.
Just because the issuer puts some statement in its prospectus stating that investors should not base their
expectations on any performance of the issuer (and developers) and/or that the token is sold only as a utility token (not for investment gain), such statements are irrelevant if the investors have a
reasonable expectation otherwise. The Howey Test specifically states that all obfuscations are ignored and only the economic reality is relevant.
The point is that any token sold where the investor has an expectation of gain and the expectation is dependent on the efforts of the developers/issuer, then it is a security.The entire point is that the issuer/developer is securing the funds invested and providing for the gain of the investor, in the expectation inside the mind of the investor. The governments regulate these activities, because investors are easily fooled by snakeoil salesmen, and worse is that when a mania develops then even rational investors no longer care about whether the snakeoil is worthless, because everyone is buying because everyone else is buying. And this leads to a
South Seas or Tulip Bubble where the entire economy of a nation or the world can collapse, because the entire wealth of a nation can be routed from productive activities to funding issuers and their hookers and cocaine.
The regulators will be putting a stop to all these illegal activities, whether you understand it or not.
Given all ICOs up to now are securities, then next issue to consider is whether they were issued illegally. There are some exemptions from registration, thus some cases of ICOs might not be illegally issued. However, in all cases in most jurisdictions, registered and unregistered securities (even if not illegally issued) may not (except between accredited investors) be traded until they are registered and they must be traded only on registered exchanges.
Those who are trading these are thus also doing illegal activity!
Cryptocurrency is an asset that does not give you a portion of ownership in a company, or a right to collect a portion of an asset or property upon request.
I agree with this. Unfortunately, it seems based on various comments and threads in this forum that many investors simply are ignorant of that fact.
That's the genius of an ICO. If a company follows the traditional IPO method of raising funds, they issue stocks and the investors actually own a piece of the company. Buy enough stocks and you can even influence the direction of a company. Management is obligated to the stockholders to a certain extent. In the case of an ICO you're basically giving the buyer nothing of value for their money. You retain 100 percent ownership of your company and owe the investor nothing. You don't even have to pay them back like if you borrowed the money by traditional methods.
This principle is what makes ICOs such a scammy way of raising funds.
Actually that is another reason that securities are regulated. To be sure that there is legally binding disclosures on the use the funds. This is in the anti-fraud provisions of the Securities Act.
This notion that investors of ICOs are not shareholders in an enterprise is not true if the decentralized ledger is an enterprise because the reasonable expectations of the investor are that the developers will develop the ledger code, promote it, and other efforts that the funds are supposed to be used for.
Yeah your presumptions are sort of true here but not fully truthful. The first thing is ICO, in general their tokens which are distributed through the ICO stage is actually a symbol of shareholder that we get from the distributing company. So yeah we can say that it's not a ownership but at least partial sharing of their profits in later stages of ICO.
Just because there are no voting rights, doesn’t mean it is not an investment security. There are classes of stocks that are issued without voting rights and they are still securities.
What makes it a security is that there is an expectation of gains (appreciation and/or dividends) that depend on the efforts of the issuer. That makes it a shared enterprise that investors own a part of. Lack of voting rights does not remove all of the ownership aspect. A security is never 100% ownership even with voting rights. The entire point is that the issuer is securing some of the investor’s ownership, because the investor relies on some efforts of the issuer.
Holding a baseball card and waiting for the player to make the hits is kinda similar thing here.
The baseball card investor is not invested in some ongoing enterprise. The player is an individual who has a certain talent and his performance is
independent of the funds invested.
If I go issue trading cards for famous crypto developers, that does not make them investments in any enterprise. If someone issued an ICO which were trading cards on Ethereum, and all the features were completed at the time of the sale, these would not be securities even though there is an expectation of gain, because there would be no expectations of ongoing efforts of the issuer. I haven’t studied
Jesuscoin carefully, so it might be an example of not being a security. But it could still fall under the scope of MLM scheme:
Finally, there is the possibility that securities regulation will wind up being mostly irrelevant and we’re all barking up the wrong tree. Because coins aren’t actually traditional securities and (usually) confer no legal rights in anything (with some recent token purchase contracts being so vague and issuer-friendly as to border on being illusory or unconscionable from the perspective of the purchaser), there is also a non-zero risk that coin offerings will be classed as MLMs of some kind that are
“organized and operated in such a manner that the realization of profit by any participant is predicated upon the exploitation of others who have virtually no chance of receiving a return on their investment and who had been induced to participate by misrepresentations as to potential earnings.”
When the current bubble collapses (and it will), this last point might become more relevant, particularly if n00b bagholders grab their pitchforks and start asking Uncle Sam to get involved so help them get their money back. Which, if these are investment contracts, is a request aforementioned bagholders will be perfectly entitled to make.
If this happens, although the SEC will stay in the loop, the really exciting action will be in the domain of the tort lawyers and federal and state prosecutors working in tandem with the FTC. See, e.g., the recent case of Josh Garza and GAW Miners (which involved fraudulent misrepresentations relating in part to a cryptocurrency called Paycoin). Although in the civil enforcement action the SEC got a $12 million default judgment, the U.S. Attorney got a guilty plea for one good, old-fashioned count of wire fraud. No Securities Act required.
Note that if this interpretation is adopted, some state laws cast a much wider net to penalize participants than Section 5 of the Securities Act of 1933 does.
IANAL. This is not legal advice.
