Did the SEC just blink? It’s a breakthrough they also acknowledged that a token can change its characteristics over its lifetime. And puzzling that it took 5 months to respond to @RepTedBudd’s letter? https://t.co/DuEDcqfG4y
Thanks for the advice, require little bit effort to find out. Here it is.
"purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework."
On a related point, the swap raises an interesting question - is Kin going to try and argue Kin 3 is a new and different token, and that Kin 1 which is the target of the SEC has been burned? They make no mention at all of the distinction between chains in their response. It might be a bit of a stretch given the 1:1 conversion but it is technically a different token.
The issue the SEC is going to have will be with KIK and Ted's comments he made almost a year ago which the SEC can use against him. We'll see... He got himself in a jam to make the KIK/KIN deal happen... I was going to write Hester P. but in light of what Ted said, I put my energy elsewhere. With that said all is not lost. KIN will be ok.
Without ever mentioning ETH directly, Clayton stated that he had been asked if he agrees “with certain statements concerning digital tokens in Director Hinman's June 2018 speech.” Here is his statement:
“I agree with Director Hinman's explanation of how a digital asset transaction may no longer represent an investment contract [a security] if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts.”
Edit: not saying ETH is a security, just kind of a misleading title...like S10's having wallet out the gate and every other crypto headline...not being an ETH hater, just a realist.
It'd be pretty foolish to consider cryptos securities. Their analog is more equivalent to currencies where you can exchange them for a service or something.
A security is defined as a financial asset which in turn is defined as non physical contractual claims. Having hundreds of ETH doesn't give you any contractual obligations to any derived claims (like bonds, bank deposit, or stocks do). A crypto contract on the other hand is a different story and might be considered a security (since there is some contractual obligations to receive some specified amounts of that coin)
Edit: forgot an important part of the definition of a security: the financial asset must be tradable
From my experience in studying US Securities Legislation, recent case law related to token offerings and the advice given by my US Lawyer it's not actually as straight forward as saying cryptos aren't securities.
If you issue an ERC20 token to crowdsource the funds to build the platform which will provide the service you promised to the purchasers of the token, that token is almost definitely going be classified as a security offering. It has no value without the efforts of a 3rd party.
If you issue a token that requires some dependency on your business relationships, ongoing intervention, or otherwise reliant on you to provide services for it to function, it is almost definitely going to be classified as a security.
If your token is fully functional at the time of issuance and not reliant on ongoing intervention or services provided by the issuer then that token should probably not be deemed a security.
A basic litmus test is; if the issuers of the token all died in a plane crash tomorrow, would the project still operate as advertised at the crowdsale and have value? If yes, you're probably not a security, if no then you probably are.
The definition is going to be largely hinged on the efforts of a third party clause of the howey test.
That doesn't mean that all crowdfunding ERC20 tokes will always be considered securites though. It's possible to be reclassified after your platform is fully operational as long as its autonomous and decentralised.
A good example based on what the SEC has said in the past that the token sale of ETH was an unlicensed securities offering since the platform was not completed yet, but ETH tokens are no longer considered securities since the platform is now fully autonomous with no central point of failure.
It's possible the SEC could still fine the issuers of unlicensed securities offerings, even if the token is no longer deemed securities.
Even though it's a grey zone of classification, personally i think it makes sense and will become clearer as more case law emerges as to what is considered a dependance on a third party.
If you're using other peoples money to build your product, they are effectively shareholders and should have the same rights / protections.
rsgraeme2 - 3 years account age. -25 - 25 comment karma.2 months ago
replying so i can save this comment. great summary.
CryptoAnthony4 - 5 years account age. 500 - 1000 comment karma.2 months ago
Do securities have to be investments have be purchased with the idea it will go up in value?
What if I crowdfund a video game by selling licenses to the game (or special in-game items) in exchange for the money to fund the game's development. The license of the game (and/or in-game items) are not a securities, right?
Now, what if someone creates a market where you can buy/sell licenses to crowdfunded games in development. Say Game Dev A is falling behind on deadlines and I don't believe the game will ever be finished, so I decide to trade my license to that game for what Game Dev B is creating. So say everyone is aware of this so you need two Game A licenses to purchases one Game B license, or the exchange allows to trade licenses for USD.
So, would this be securities?
It's kind of tough to say. I'm in no way an expert in security law, but from my basic understanding it's determined based off whether there is some obligation between the parties.
Consider the traditional securities: bonds and stocks. The purchase of a bond is saying the issuer (i.e. the company) owes me (the buyer) X amount (the principal) plus interest (coupon rate) on some Y date (the maturity date). If the company goes under they have a legal obligation to pay back any issued bonds through their liquidated assets.
Stocks are another security that says I own some percentage of the company (depending on how many share you own and how many there are in total). Again if for some reason the company goes under and liquidates their assets they have a legal obligation to distribute any remaining assets AFTER all debts have been paid off to the shareholders.
In your example I don't exactly think in either case game licenses would be considered a security as there is no legal obligation on the part of the game dev to deliver, though if they don't they may be legally required to reimburse you for the value of the license.
Edit: Taking a look at [this Kickstarter blog post](https://www.kickstarter.com/blog/accountability-on-kickstarter) it looks like there is a legal obligation on project owners to fulfill their promises to backers. So with the addition of your secondary market it would be considered a security I believe. According to [Wikipedia](https://en.m.wikipedia.org/wiki/Security_(finance\)) a security is a **tradable** financial asset. The legal obligation to fulfill the project's promises makes being a backer a Financial Asset and being able to trade that designation of being a backer makes it a security.
Yours is a fantastic summary.
It's also worth adding that at no point does Clayton state outright in his letter that Ethereum is not a security. He *does* agree explicitly with the Director's statement that a crypto token can change from being a security into not being one. But he stays away from flat-out saying that Ethereum is not a security, despite the attention-grabbing headline.
Oracle333555Crypto God | QC: ADA 96, CC 42, BTC 412 months ago
but wouldn't that be like saying the contract I signed with my plumber to fix my sink could be a Security?
except for the fact that cryptocurrencies aren't accepted practically anywhere. and there's not demand for such things outside of circumventing regulations/ embargos/sanctions and laundering money/ accepting payment for services that you cant use bank for. aka the compelling use case is criminal activity.
Your right crypto currencies like Bitcoin depend extensively on the size of the network and the number of merchants willing to accept them. Crypto tokens however are kind of more like arcade tokens for an arcade that most of the time hasn't been built yet and can be bought and sold to other people interested in playing in the arcade when it finally does open.
Lawyer here. Unfortunately it’s not really accurate. Rights granted by securities - if any - are partly based in equity and partly based in property; they’re not contractual at all.
But I’ll give OP here the benefit of the doubt because those are quite complicated topics; he may be using “contractual” in the colloquial sense and not in the legal sense.
Although, we are on Reddit and the rules of pedantry mandate that we point out innacuracies. Do we break out the pitchforks now?
l3ban0nd0n1 - 2 year account age. 100 - 200 comment karma.2 months ago
That last line 😂😂
My dude, derivatives (which span a wiiiiiiiiiide array of securities) are literally just complex contracts, As are warrants, options, swaps, etc. What do you mean when you say they’re “not contractual at all”?! 😂😭
Not a corporate lawyer, eh? :)
There’s several issues mixed together here: (1) whether something is a security, (2) the different kinds of securities, and (3) what rights are granted by the various types of securities. There are whole treatises written on these things that, suffice to say, won’t be given justice by me frantically typing on my phone while in bed.
I just wanted to point out that there are probably no contractual rights conferred by the mere possession of cryptocurrencies. And that fact alone is probably not dispositive of whether a cryptocurrency is a security or not. It’s complicated.
But, since it’s getting late, and I’m not getting paid for this, I’m comfortable leaving this debate here. :)
Edit: I couldn’t leave it there. :) I see what you’re saying. I used a blanket statement above when I meant to limit it to just the instant case of mere possession which is what the OP was talking about. The blanket statement would, as you say, expand to include other types of securities’ rights not being discussed here, like futures. My bad.
l3ban0nd0n1 - 2 year account age. 100 - 200 comment karma.2 months ago
No worries man, I just thought the “rules of pedantry” line was hilarious given the context/at the time. Personally, I have no idea wtf cryptos are but I enjoyed the brief giggle 🤓
The plaintiff in the Tezos law suit has been axed for his conflicting behavior to his claim against the project and it's creators. He alleged Tezos fund raiser (donation) violated securities regulation. Since he's gone, the next plaintiff in line is able to step forward to carry the class action, interestingly has not named sale of securities in their claim. It may not be decided by a judge, but who knows. I'm not a lawyer, just my opinion.
That's out of scope of the lawsuit afaik. The contention is whether or not the foundation engaged in the sale of an unlicensed security via the Tezos fundraiser. Most would agree they did not, but who knows what a court will say.
I don't think this is that significant - no one really doubted that this was the SEC's position - people like Hinman don't go rogue. The question is and always was whether Kin can decentralize quickly enough (while controlling almost all the supply) and how harsh will the penalties be for the ICO, which is in the past and can't be fixed.