I chatted with a securities lawyer indirectly through another person, i.e. I do not know who the attorney is and I do not want to know (unless I need to hire such an attorney formally), but he did read my prior post. This was a very informal discussion and not to be construed as legal advice. Nothing I am writing below can be construed to have been written by any attorney. These are my own thoughts. The attorney actually did not state any of the following. These are my own conclusions.
What I realized is now obvious in hindsight, although what I say below was not articulated by the attorney. This is my own conclusion that spawned from the ideas that were raised in the brief informal brainstorming discussion. Realize I am analysing from the conservative perspective on what is reasonably safe to presume, and not wanting to lawyer up and take a huge risk of losing in some regulators’ court in the many jurisdictions around the world (i.e. multifarious jurisdictional jeopardy).
Airdrop re-issuance does not remove the fact that if was a security before, it remains a security after, because the distribution has not changed. There needs to be a stronger disconnection between the prior token which is presumed to be a security (e.g. was ICO issued) and the new airdropped (i.e. reissued) one, otherwise the economic reality has not changed: which is that token and all its derivatives are subject to the resale restrictions on the issued security.
Contrast this with a fork that does not airdrop the same distribution, i.e. not an airdropped xerox copy of a preexisting token’s distribution.
Thus if EOS is a security, the airdropped eEOS would be also. The reissuer of eEOS may or may not be culpable as a common enterprise under the Howey test depending on the circumstances. I was arguing coherently about the issuer perhaps not being culpable, but I was not arguing correctly about the token converting from security to a non-security due to the airdrop.
The mistake in my logic was that just because the issuer might not be culpable for reissuing (i.e. no investment contract formed with the original investors), that does not change the economic reality that the new distribution is the same as the prior one.
Actually the attorney did not actually state it that way, but I realized it after carrying forward his concerns into a more coherent understanding of the orthogonal facets of the culpability of the reissuer of the airdrop vs. the security-status of the airdropped token.
Yeah I can make (somewhat legally dubious but maybe successful) arguments that the reissuer is not culpable for issuing a new security (i.e. the lack horizontal commonality between ICO investors and reissuer), but this seems to have no bearing on removal of the former security status if the distribution remains a xerox copy.
IOW, if it looks and quacks like a duck, then it is a duck. Xerox copying the distribution of security, is still the same security (regardless of the culpability of the issuer of the airdrop).
The new issuance is also a dividend. But unlike chocolate candy gifts given as dividends to shareholders or token holders, the airdropped token has same tradeable and fungible qualities of the ICO issued token, thus it still quacks the same and has the same familial structure (aka distribution). The economic reality has not changed.
That is to say that randomly dropping freeware like-kinded things to the investors of the security, doesn’t change the nature of the thing, even though the entity doing the dropping (giving) is not necessarily (depending on the circumstances) culpable for reissuing a security.
Disclaimer: IANAL. This is not legal advice.
using an airdrop to avoid the securities problem seems to be just trying to use a loophole to get around the problem. i would think such a loophole would be closed fast. if there is a one to one correlation between the tokens it will be treated the same as the original imo. even if it seems to pass the hewey test initially i would worry that such a token will wind up being treated as a security down the line, jeopardizing any project associated with it.
Well the principle explained in the newly released SAFT white paper, is that when the common enterprise or any other prong of the Howey test such as “from the efforts of others” has ceased, then the sales of the tokens are no longer securities. However, the underwriter principle has to be dealt with which seems to not allow a token to magically convert from security to non-security unless the investors have held the token for up to 3 years. The SAFT proposes another way to side-step the underwriter aspect:
[…]
Moreover, since the tokens are not securities and the SAFT is non-transferrable, the investors do not, merely by purchasing the SAFT, risk being deemed underwriters if they resell their tokens.⁷⁵
⁷⁵ Investors are participants in the distribution of the utility tokens following conversion of the SAFT, but the token is not a security. Though the SAFT is a security, they do not distribute it. The definition of underwriter under the Federal Securities Laws is limited to the participation in a distribution of a security, thus SAFT investors need not fall within the definition or risk exposure associated with being deemed an underwriter. See Securities Act Section 2(a)(11), 15 U.S.C. § 77b(a)(11).
So by the above logic, a token which was issued and sold as a security (e.g. pre-functional vaporware ICO), would not necessarily become a non-security when it is sold by investors later when it is fully-functional and has sufficient free market factors other than just ongoing developer efforts, i.e. when the “from ongoing efforts of others” prong of Howey is no longer satisfied. Because the investors could be considered underwriters if they had not held the token for some reason other than to distribute it, which as I had pointed out upthread may require up to a 3 year hold before selling.
The separation of the issuance into a security that has rights for a token (instead of issuing a pre-functional token or promise) and separate issuance of the fully-function token is argued that the investors in the former (e.g. a SAFT) had no intention to distribute a security because the fully-functional token is argued to not be a security because it fails the “from ongoing efforts of others” prong of Howey. Whether the issue of the former security (which can be traded for a fully-functional platform token later) was legal is a separate issue, with for example EOS’ issuance being very suspect of not complying with securities regulations.
The question is does that also apply to an airdrop with the same distribution. I think the key factor is whether that airdrop is indeed a free market action or some premeditated or expected action undertaking by the original common enterprise (however so obfuscated).
