But anyhow as long as they arent selling equity or ownership or fund raising on "unregistered securities" the SEC can only ask "informal questions".... but yes you are right it is popcorn time.
Not exactly. The following are **clearly** securities within the meaning of 1940 Act and case law:
(1) Prime Hashlets
(2) Zen Hashlets
(3) Hashcoin when purchased using anything of commercial value (bitcoin, litecoin ... interestingly, it seems that GAW believes that purchases using Hashcoin might exempt them but that would imply Hascoins lack commercial value. Would love to see GAW's legal memo on that point)
I have made this point before, but it seems that folks might not understand how obvious this is. So here is a little backup for that:
1. 1940 Act definition with less important parts redacted for ease of reading (Section 2(a)(36)):
“Security” means any ... certificate of interest or participation in any profit-sharing agreement ... or subscription, transferable share, investment contract, ... , any ... or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing."
Note that any "participation in any profit-sharing agreement" is very broad and on its face would include just about any contractual arrangement. So courts have limited securities a bit to interests in profit-sharing agreements where the purchaser has no active involvement in the business enterprise but is merely providing funds for use by the business in operating - see Howey case below. That still leaves hashlets wide open.
2. Note that the 1933 and 1934 Acts have slightly different definitions, but commentators and the SEC itself take the position that all three Acts are the same so the above definition is as good as any other for most purposes and for all purposes relevant here.
3. The seminal U.S. case setting the test for whether an profit-sharing agreement or investment contract is a "security" is the U.S. Supreme Court's SEC vs. W.J. Howey Co., 328 U.S. 293 which you can easily find in full text by google. That case involved a promotion company that sold profit shares in a citrus grove, coupled with a services agreement pursuant to which the management company took out fees for servicing the grove. Sound familiar? Substitute the words "e-coin mining farm" for "citrus grove" and you have the answer pretty clearly. The "rule" of the case is this (and don't take my word for it, google the case and read any law review article about Howey from any respected U.S. law school journal ...): "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promotor or third party." 328 U.S. at 298-99.
4. Clearly, a Prime Hashlet and Zen Hashlet meet this definition:
(a) Contract, transaction or scheme: CHECK
(b) Person invests his money in a common enterprise: CHECK (note also that GAW has not limited the profit of Zenpool to just mining, which MIGHT otherwise make this okay arguably; but instead Zenpool can make money on lending, renting, IPOs, Hashcoin, etc. so it really is analagous to an equity investment where you expect profits based on the business acumen of Josh himself)
(c) And is led to expect profits based solely on the efforts of a promotor or third party: CHECK - given the opacity of Zenpool and the forthcoming Hashbase and Hashcoin, and the "trust me" statements from GAW/Josh repeatedly, no one could possibly dispute that a purchaser of a hashlet is going to make money or lose money based solely on the success or failure of Josh's grand plan.
Any reasonably counter to this would have to somehow explain how a Zen hashlet and/or Prime Hashlet and/or Hashcoin purchase fails to meet these criteria.
5. I raised this issue on Hashtalk once, and of course the discussion was short-lived as everyone involved was banned (except me, strangely). The asinine red-herring response was that Howey was inapplicable because it involved government subsidized farming. While factually that is a distinction, no lawyer with even a modicum of legal education would accept that as a distinction. The fact is that Howey is widely (universally) accepted as THE test for whether a profit-sharing agreement is a security, and NOWHERE in Howey is the issue of the citrus grove being government funded relevant to the reasoning or rule of that case. Read the case, substitute the words "coin mining farm" for citrust grove, and explain to yourself or anyone else how you can come to any conclusion other than one which renders Prime and Zen hashlets as securities. I would love to hear a cogent theory to the contrary, because it is very obvious when you actually read the case.
So to me the interesting question is - so what? Being a security, hashlets have some real problems for GAW but these may be solvable:
(1) Right to rescission. Since GAW did not follow federal or state rules in issuing its hashlet securities (remains to be seen on Hashcoin) state laws universally require GAW to give back money invested. This could be the reason why we had the prime buyback? Just speculation but maybe GAW got legal advice late in the game.
(2) Failure to disclose material facts. Being a security, GAW must disclose to all potential purchasers all material facts about hashlets, hashcoin, etc. Clearly, that has not been done nor does it seem likely GAW will do that. That leaves GAW open to lawsuits for misrepresentation/failure to disclose both from regulators and as class actions or individual claims.
