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First, I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise. If the protocol is already s

First, I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise. If the protocol is already specified, and the token has clear utility. I don't know if that's the case here, but just taking the article at face value. Second, even if a particular token represents a security, offering it to the public is not "securities fraud" in and of itself. Fraud is a material misstatement or omission. What the author is talking about would be an unregistered securities offering, which if no exemption is available, would be illegal. Illegal but not necessarily fraudulent per se. This is not to say that Colony should have an ICO. I don't know anything about their specific case. But this article is not useful to anyone else trying to make a similar decision.

collinvine 9y ago
> I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise Are you a lawyer? Because it wasn't the opinion of the author; it was the opinion of their lawyers. > offering it to the public is not "securities fraud" in and of itself. Right. In the US, you can abide by the new-ish JOBS act for crowdfunding from non-accredited investors. You'd be selling a security. The problem with token sales is that they are trying _not_ to be securities. This may not be "fraud", but it is likely in violation of securities laws. > this article is not useful to anyone else trying to make a similar decision. The takeaway is that no project going forward should do a pre-functional token sale.
- zekevermillion 9y ago
  Yes, I'm a lawyer. I'm not your lawyer though. And it doesn't matter -- even non-lawyers are capable of reasoning about legal topics. You do not appear to be a lawyer, yet you have an opinion. The takeaway from this article is just wrong, b/c it implies that the SEC thinks token presales are all inherently fraudulent. That is not correct. Many ICO's are illegal securities offerings, probably. And many are also fraudulent. These two things often overlap. They are not equivalent though. Howey is a FACT DEPENDENT TEST. That means, if you are planning any kind of token offering, you have to get advice about your specific circumstances. As a heuristic, "stay away from ICOs" is pretty solid. No one will be harmed by this. Many people will be harmed by participating in crappy ICOs, either as promoters or buyers. However, HN is a forum for technical discussion, and I'm criticizing the technical basis of that article.
wmf 9y ago
If the token trades on exchanges then it's no longer purely functional. And as the article says, if the function is not available yet then speculation is the only possible use.
- zekevermillion 9y ago
  I don't think it has to be "pure". Ethereum is not purely functional. However, it helps if it has a significant functional use. It does seem that the best-advised projects avoid listing pre-sale tokens on an exchange. This hasn't stopped them from raising loads of money for their respective foundations, in exchange for cold wallets or invite codes. The devil is always in the details. Very few people have the relevant experience to advise in this field with any confidence. I do not claim to be one of them.
Sangermaine 9y ago
I think you're fixating on the word "fraud" which, reading the piece, I think the author is wrongly using to describe the advice his counsel has given him since the entire discussion is about illegal securities offerings. So, mentally set the word "fraud" aside if that's bothering you and consider the article. >But this article is not useful to anyone else trying to make a similar decision. If the analysis in the article is correct, it is absolutely useful. They key takeaway is this: >Here’s the short of it. As far as we can tell, no matter what, tokens purchased for pre-functional products are securities. After it is functional, it depends. >Here’s the short of it. As far as we can tell, no matter what, tokens purchased for pre-functional products are securities. After it is functional, it depends. Of course, as you note below, Howey is a fact-dependent test and every offering requires its own unique examination. However, as a general guideline this is useful advice for others in a similar situation and provides guidance on the questions they should be asking about their potential ICO.
uiri 9y ago
If they make claims in their ICO-related documents that the coin is not a security when it is in fact a security, then they are committing securities fraud. You're right that if they straight up said "this is an unregistered securities offering", it would not be fraudulent.
- kenbaylor 9y ago
  That would be correct if the law was settled in this area. It is not. Generally you also need to prove intent for fraud, and if the law is not settled, it will be hard to prove fraudulent intent.
  - collinvine 9y ago
    One argument here is that the law is settled. If it's securities law that applies, as the SEC has started, then it's been settled for over 80 years.
mannykannot 9y ago
Could you expand on how just having a protocol specified is, in itself, useful? As far as I can tell, no-one is saying that Colony is fraudulent, merely that its token looks like a security.
AlexCoventry 9y ago
> I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise. If the protocol is already specified, and the token has clear utility. I agree it's not necessarily going to be deemed a security, and I am not a lawyer, but from my reading of Howey and related decisions I would say whether an instrument is deemed a security will come down to how it was marketed and what the general expectation and intent of the purchasers seemed to be. Since Howey emphasizes that only the function of the instrument matters, not the form, I would say that even if a cryptocurrency has use value, it could still be deemed a security if a large fraction of its purchasers mainly expect to achieve a passive profit by buying it. After reading the blog post, I can see why the Colony developers are being cautious
- jon_richards 9y ago
  Do concert tickets count as securities? What about when most of the tickets are bought by resellers using bots? Genuinely asking, seems like a badly worded law.
  - AlexCoventry 9y ago
    That's an interesting question. Based on this huge back and forth I think it's a gray area, where the details of the instrument matter a lot: https://www.sec.gov/divisions/corpfin/cf-noaction/ticketreserve091103.htm https://www.sec.gov/divisions/corpfin/cf-noaction/ticketrese... I don't know that it's a badly written law so much as one which gives its enforcers and arbiters a lot of latitude to decide its jurisdiction because the bad behavior it's trying to control is so hard to pin down legislatively. The law could certainly be abused, and probably has, but the cases I've read have left me with nothing but admiration for the wisdom and consideration with which it's been applied. And that's despite the fact that I have a generally libertarian bent and a general dislike of over-broad laws.
  - collinvine 9y ago
    It's a good question. From what I've read, they act like securities leading up to the event, but only for a one off event. Afterwards the instrument (ticket) has no value. That makes it unlike a security.

collinvine 9y ago

> I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise Are you a lawyer? Because it wasn't the opinion of the author; it was the opinion of their lawyers. > offering it to the public is not "securities fraud" in and of itself. Right. In the US, you can abide by the new-ish JOBS act for crowdfunding from non-accredited investors. You'd be selling a security. The problem with token sales is that they are trying _not_ to be securities. This may not be "fraud", but it is likely in violation of securities laws. > this article is not useful to anyone else trying to make a similar decision. The takeaway is that no project going forward should do a pre-functional token sale.

zekevermillion 9y ago
Yes, I'm a lawyer. I'm not your lawyer though. And it doesn't matter -- even non-lawyers are capable of reasoning about legal topics. You do not appear to be a lawyer, yet you have an opinion. The takeaway from this article is just wrong, b/c it implies that the SEC thinks token presales are all inherently fraudulent. That is not correct. Many ICO's are illegal securities offerings, probably. And many are also fraudulent. These two things often overlap. They are not equivalent though. Howey is a FACT DEPENDENT TEST. That means, if you are planning any kind of token offering, you have to get advice about your specific circumstances. As a heuristic, "stay away from ICOs" is pretty solid. No one will be harmed by this. Many people will be harmed by participating in crappy ICOs, either as promoters or buyers. However, HN is a forum for technical discussion, and I'm criticizing the technical basis of that article.

wmf 9y ago

If the token trades on exchanges then it's no longer purely functional. And as the article says, if the function is not available yet then speculation is the only possible use.

zekevermillion 9y ago
I don't think it has to be "pure". Ethereum is not purely functional. However, it helps if it has a significant functional use. It does seem that the best-advised projects avoid listing pre-sale tokens on an exchange. This hasn't stopped them from raising loads of money for their respective foundations, in exchange for cold wallets or invite codes. The devil is always in the details. Very few people have the relevant experience to advise in this field with any confidence. I do not claim to be one of them.

Sangermaine 9y ago

I think you're fixating on the word "fraud" which, reading the piece, I think the author is wrongly using to describe the advice his counsel has given him since the entire discussion is about illegal securities offerings. So, mentally set the word "fraud" aside if that's bothering you and consider the article. >But this article is not useful to anyone else trying to make a similar decision. If the analysis in the article is correct, it is absolutely useful. They key takeaway is this: >Here’s the short of it. As far as we can tell, no matter what, tokens purchased for pre-functional products are securities. After it is functional, it depends. >Here’s the short of it. As far as we can tell, no matter what, tokens purchased for pre-functional products are securities. After it is functional, it depends. Of course, as you note below, Howey is a fact-dependent test and every offering requires its own unique examination. However, as a general guideline this is useful advice for others in a similar situation and provides guidance on the questions they should be asking about their potential ICO.

uiri 9y ago

If they make claims in their ICO-related documents that the coin is not a security when it is in fact a security, then they are committing securities fraud. You're right that if they straight up said "this is an unregistered securities offering", it would not be fraudulent.

kenbaylor 9y ago
That would be correct if the law was settled in this area. It is not. Generally you also need to prove intent for fraud, and if the law is not settled, it will be hard to prove fraudulent intent.
- collinvine 9y ago
  One argument here is that the law is settled. If it's securities law that applies, as the SEC has started, then it's been settled for over 80 years.

mannykannot 9y ago

Could you expand on how just having a protocol specified is, in itself, useful? As far as I can tell, no-one is saying that Colony is fraudulent, merely that its token looks like a security.

AlexCoventry 9y ago

> I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise. If the protocol is already specified, and the token has clear utility. I agree it's not necessarily going to be deemed a security, and I am not a lawyer, but from my reading of Howey and related decisions I would say whether an instrument is deemed a security will come down to how it was marketed and what the general expectation and intent of the purchasers seemed to be. Since Howey emphasizes that only the function of the instrument matters, not the form, I would say that even if a cryptocurrency has use value, it could still be deemed a security if a large fraction of its purchasers mainly expect to achieve a passive profit by buying it. After reading the blog post, I can see why the Colony developers are being cautious

jon_richards 9y ago
Do concert tickets count as securities? What about when most of the tickets are bought by resellers using bots? Genuinely asking, seems like a badly worded law.
- AlexCoventry 9y ago
  That's an interesting question. Based on this huge back and forth I think it's a gray area, where the details of the instrument matter a lot: https://www.sec.gov/divisions/corpfin/cf-noaction/ticketreserve091103.htm https://www.sec.gov/divisions/corpfin/cf-noaction/ticketrese... I don't know that it's a badly written law so much as one which gives its enforcers and arbiters a lot of latitude to decide its jurisdiction because the bad behavior it's trying to control is so hard to pin down legislatively. The law could certainly be abused, and probably has, but the cases I've read have left me with nothing but admiration for the wisdom and consideration with which it's been applied. And that's despite the fact that I have a generally libertarian bent and a general dislike of over-broad laws.
- collinvine 9y ago
  It's a good question. From what I've read, they act like securities leading up to the event, but only for a one off event. Afterwards the instrument (ticket) has no value. That makes it unlike a security.