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I spent 30min on the phone with Mark Vilardo, special counsel at the SEC and the guy who will call you if you all questions about ICOs. Basically, ICOs are 99%

I spent 30min on the phone with Mark Vilardo, special counsel at the SEC and the guy who will call you if you all questions about ICOs. Basically, ICOs are 99% of the time classified as securities in the US. The main exception is if the token is non-transferrable or can be returned for what you paid for it. So, if you can't make money selling our trading it, it's not a security, which defeats the purpose of an ICO. It sounds like who the SEC goes after is subjective, but at any point in time they could bring a suit against an ICO, even gimmick coins.

colechristensen 9y ago
My followup question is, if exchanging World of Warcraft gold for currency was supported or facilitated by Blizzard, would the SEC classify it as a security? Could Blizzard have an ICO for WoW gold that could only be used as it is now with no attached ideas of selling equity?
- omarchowdhury 9y ago
  They would classify it as a security if they could conclusively prove that people were buying WoW gold "for the expectation of profits solely from the efforts of a third party or promoter."
  - everdev 9y ago
    Doesn't have to be wide spread. Even one investor complaining they thought they were going to make money is enough to satisfy the test. However, the SEC will probably only act in cases of high dollar value or many complaints.
    - laser 9y ago
      Is that really how the law is technically phrased? I doubt it. You're telling me that if Jose does an ITO (Initial Taco Offering) to open his new taco joint, selling 1000 tacos to anyone that wants to eat one, and I complain to the SEC that I thought Jose's tacos would be worth more if I resold them tomorrow, then his tacos fail the Howey Test and are classified as securities? Obviously that's not the case, but are you saying that's only due to selective SEC enforcement, not because the law has a higher standard than "Even one investor complaining they thought they were going to make money"?
      - lkrubner 9y ago
        > I complain to the SEC that I thought Jose's tacos would be worth more if I resold them tomorrow They would dismiss your complaint as silly, trivial, and obviously frivolous. That is, your complaint would fail the test of common sense.
        nikcub 9y ago
        That doesn't exclude the possibility of him being prosecuted tho and the regulation being abused. If Jose was communicating with an ISIS recruiter but they couldn't pin him on that - could they pin him on the Taco racket?
      - everdev 9y ago
        That's what I understood from my call with the SEC. That if anyone could reasonably expect a profit it satisfied that bullet in the Howey Test. For your tacos to be securities, the company would have to be working in some capacity to give those tacos more value in the future. Since tacos expire, all reasonable taco investors know that their investment will go to $0 in the near future, therefore no expectation of profit. It's amazing how broadly security is defined and enforced. The only examples I was able to discuss with the SEC that were not securities were when the asset being sold could not reasonably generate a profit and could not be transferred. Basically like selling a product or accepting a donation. There is also securities case law where a company sold a security to a single person or very few people and they were sued successfully.
        dragonwriter 9y ago
        > That's what I understood from my call with the SEC. That if anyone could reasonably expect a profit it satisfied that bullet in the Howey Test. “reasonably expect”, in law, imposes an “objective” standard; the mere subjective expectation of a buyer won't meet it, the court applying the test will need to find that the expectation was objectively justified in the concrete circumstances that existed. It's a much higher bar than merely did any individual buyer have a subjective expectation of profit.
- everdev 9y ago
  The SEC uses the Howey Test: 1. Was there an investment of money? (money is actually broadly defined to mean anything of value) 2. Was there an expectation of profits from the investment? (this is easy to prove because it's the opinion of the investor) 3. Was the investment of money in a common enterprise? (this means are the interests of the investor and company aligned, or does the investment go into running a business) 4. Does profit come from the efforts of a promoter or third party? (This means is the investor mostly powerless in having their investment go up our down in value) In your WoW example: 1. Yes 2. Probably for someone 3. Yes, the money is used to develop the platform 4. Yes, if Blizzard hypes their coin or if you can trade it on an exchange I think the biggest difference between an ICO and a digital good is that ICOs are traded on exchanges. If you buy a digital good and can only use/redeem/trade on the company's platform then it is not a security.
  - honestlyreally 9y ago
    Not being that familiar with WoW, wouldn't it be classed as income more than speculation? These people grinded away at a game and earned "gold", now they want to convert it into a different currency. Doesn't seem speculative for the people playing the game. Though for a trader it is. Fail to see the difference between buy/sells on the company platform compared to a third party. Both could be used for speculation.
    - everdev 9y ago
      The difference from what I understand is an exchange vs a platform. A platform has utility, an exchange is investing. On an exchange you can trade one currency for another to ideally make a profit. On a platform you buy/sell as part of using the system.
      - politician 9y ago
        An exchange is a platform...
  - regulation_d 9y ago
    I'm not sure you can hand wave the "expectation of profits" factor as easily as you did. Seems like it would have to be a reasonable expectation of profits and would probably have to be true of the majority of the purchasers. Imagine that I bought $10k worth of Chuck E. Cheese tokens and I could convince the SEC that I sincerely expected the value of those tokens to go up substantially. I doubt that would be enough to meet the Howey requirements, even if my expectation was sincere.
- jayd16 9y ago
  Fraud is more about whether you were lied to not whether a product could be lied about.
- zekevermillion 9y ago
  Probably not a security. But transferable WoW gold has bigger problems -- money transmitter laws. It would make Blizzard a money transmitter like E-gold, [1] or liberty reserve. Any centralized e-money issuer is doomed. That is an important part of why bitcoin exists. [1] https://www.wired.com/2009/06/e-gold/ https://www.wired.com/2009/06/e-gold/
kenbaylor 9y ago
This is very insightful. It is however a vast expansion from what they have publicly stated in the DAO report. https://www.sec.gov/litigation/investreport/34-81207.pdf https://www.sec.gov/litigation/investreport/34-81207.pdf Mr Villardo's comments are chilling. If as you said "Basically, ICOs are 99% of the time classified as securities in the US.", the SEC needs to come out and say it. This will of course lead to the freezing of US persons from participating in most ICOs, and lead most of our crypto community to move to Switzerland.
- nl 9y ago
  lead most of our crypto community to move to Switzerland ICOs are not crypto. They use a small amount of cryptography in their implementation, but no serious member of the real crypto community is working on any ICO (based on Ethereum anyway. Yes, a proof of stake coin is worth working on).
  - CryptoPunk 9y ago
    Token sales are on track to raise over $2 billion worth of cryptocurrency this year, which is more than early-stage VC funding, and most of that for distributed application (mostly blockchain based) development. Given crowd funding through token sales is the first major use-case for cryptocurrency, and is funding numerous cryptocurrency projects, I can't see how one could argue that it is not important to the cryptocurrency sector. Also, almost all token sales are on Ethereum.
    - uberrr 9y ago
      What do you mean by "more than early-stage VC funding"?
      - CryptoPunk 9y ago
        Angel and seed VC funding: http://static2.businessinsider.com/image/598c2fd427fa6b5e17448a25-538/goldman-ico.jpg http://static2.businessinsider.com/image/598c2fd427fa6b5e174...
WikipediasBad 9y ago
This is completely wrong on so many points, I truly doubt that you are even honest about talking to Mr. Villardo. He wouldn't be that stupid to even insinuate something along those lines. Magic the Gathering Trading Cards would be classified as securities by the card printing company with your silly interpretation. After all, they are transferable, the value of the rare cards go up the more popular the game/network becomes, you can't get your money back from the store or the company if you wanted to return your pack of cards, so it's a security? Please. I'd recommend editing your post so you don't come off as clearly clueless.
EGreg 9y ago
Can you please elaborate on this exception: "can be returned for what you paid for it" This seems like a safe harbor if it's true! This is huge. So, an ICO with this clause would require the company to keep all the money raised on reserve, but then if the token goes up in price and never goes back down to the original level they can start using that surplus money. Kind of like a bank does with fractional reserve lending. Do you have any more info on this?
- kd5bjo 9y ago
  What surplus money? The issuer no longer has the coins, but USD instead. If they make a second offering at a higher price later, they'll need to keep that money in reserve as well or else the new coins will be unregistered securities.
  - EGreg 9y ago
    Well, the issuer has USD / BTC whatever but has to keep full reserves to be willing to cash everyone out in a case of a "run on the issuer". This is a worst case scenario and realistically they can probably spend half of the USD / BTC / whatever raised on actually running the business. As the token goes up in price, less and less people will want to buy at the current price. At some point issuer insure themselves against the remote possibility of the price crashing and people making a run on the issuer, by buying out-of-the-money call options if they can find some underwriter. Then the underwriter's issuing the securities, and the issuer can spend some or all of the money protected by the call options / insurance.

colechristensen 9y ago

My followup question is, if exchanging World of Warcraft gold for currency was supported or facilitated by Blizzard, would the SEC classify it as a security? Could Blizzard have an ICO for WoW gold that could only be used as it is now with no attached ideas of selling equity?

omarchowdhury 9y ago
They would classify it as a security if they could conclusively prove that people were buying WoW gold "for the expectation of profits solely from the efforts of a third party or promoter."
- everdev 9y ago
  Doesn't have to be wide spread. Even one investor complaining they thought they were going to make money is enough to satisfy the test. However, the SEC will probably only act in cases of high dollar value or many complaints.
  - laser 9y ago
    Is that really how the law is technically phrased? I doubt it. You're telling me that if Jose does an ITO (Initial Taco Offering) to open his new taco joint, selling 1000 tacos to anyone that wants to eat one, and I complain to the SEC that I thought Jose's tacos would be worth more if I resold them tomorrow, then his tacos fail the Howey Test and are classified as securities? Obviously that's not the case, but are you saying that's only due to selective SEC enforcement, not because the law has a higher standard than "Even one investor complaining they thought they were going to make money"?
    - lkrubner 9y ago
      > I complain to the SEC that I thought Jose's tacos would be worth more if I resold them tomorrow They would dismiss your complaint as silly, trivial, and obviously frivolous. That is, your complaint would fail the test of common sense.
      - nikcub 9y ago
        That doesn't exclude the possibility of him being prosecuted tho and the regulation being abused. If Jose was communicating with an ISIS recruiter but they couldn't pin him on that - could they pin him on the Taco racket?
    - everdev 9y ago
      That's what I understood from my call with the SEC. That if anyone could reasonably expect a profit it satisfied that bullet in the Howey Test. For your tacos to be securities, the company would have to be working in some capacity to give those tacos more value in the future. Since tacos expire, all reasonable taco investors know that their investment will go to $0 in the near future, therefore no expectation of profit. It's amazing how broadly security is defined and enforced. The only examples I was able to discuss with the SEC that were not securities were when the asset being sold could not reasonably generate a profit and could not be transferred. Basically like selling a product or accepting a donation. There is also securities case law where a company sold a security to a single person or very few people and they were sued successfully.
      - dragonwriter 9y ago
        > That's what I understood from my call with the SEC. That if anyone could reasonably expect a profit it satisfied that bullet in the Howey Test. “reasonably expect”, in law, imposes an “objective” standard; the mere subjective expectation of a buyer won't meet it, the court applying the test will need to find that the expectation was objectively justified in the concrete circumstances that existed. It's a much higher bar than merely did any individual buyer have a subjective expectation of profit.
everdev 9y ago
The SEC uses the Howey Test: 1. Was there an investment of money? (money is actually broadly defined to mean anything of value) 2. Was there an expectation of profits from the investment? (this is easy to prove because it's the opinion of the investor) 3. Was the investment of money in a common enterprise? (this means are the interests of the investor and company aligned, or does the investment go into running a business) 4. Does profit come from the efforts of a promoter or third party? (This means is the investor mostly powerless in having their investment go up our down in value) In your WoW example: 1. Yes 2. Probably for someone 3. Yes, the money is used to develop the platform 4. Yes, if Blizzard hypes their coin or if you can trade it on an exchange I think the biggest difference between an ICO and a digital good is that ICOs are traded on exchanges. If you buy a digital good and can only use/redeem/trade on the company's platform then it is not a security.
- honestlyreally 9y ago
  Not being that familiar with WoW, wouldn't it be classed as income more than speculation? These people grinded away at a game and earned "gold", now they want to convert it into a different currency. Doesn't seem speculative for the people playing the game. Though for a trader it is. Fail to see the difference between buy/sells on the company platform compared to a third party. Both could be used for speculation.
  - everdev 9y ago
    The difference from what I understand is an exchange vs a platform. A platform has utility, an exchange is investing. On an exchange you can trade one currency for another to ideally make a profit. On a platform you buy/sell as part of using the system.
    - politician 9y ago
      An exchange is a platform...
- regulation_d 9y ago
  I'm not sure you can hand wave the "expectation of profits" factor as easily as you did. Seems like it would have to be a reasonable expectation of profits and would probably have to be true of the majority of the purchasers. Imagine that I bought $10k worth of Chuck E. Cheese tokens and I could convince the SEC that I sincerely expected the value of those tokens to go up substantially. I doubt that would be enough to meet the Howey requirements, even if my expectation was sincere.
jayd16 9y ago
Fraud is more about whether you were lied to not whether a product could be lied about.
zekevermillion 9y ago
Probably not a security. But transferable WoW gold has bigger problems -- money transmitter laws. It would make Blizzard a money transmitter like E-gold, [1] or liberty reserve. Any centralized e-money issuer is doomed. That is an important part of why bitcoin exists. [1] https://www.wired.com/2009/06/e-gold/ https://www.wired.com/2009/06/e-gold/

kenbaylor 9y ago

This is very insightful. It is however a vast expansion from what they have publicly stated in the DAO report. https://www.sec.gov/litigation/investreport/34-81207.pdf https://www.sec.gov/litigation/investreport/34-81207.pdf Mr Villardo's comments are chilling. If as you said "Basically, ICOs are 99% of the time classified as securities in the US.", the SEC needs to come out and say it. This will of course lead to the freezing of US persons from participating in most ICOs, and lead most of our crypto community to move to Switzerland.

nl 9y ago
lead most of our crypto community to move to Switzerland ICOs are not crypto. They use a small amount of cryptography in their implementation, but no serious member of the real crypto community is working on any ICO (based on Ethereum anyway. Yes, a proof of stake coin is worth working on).
- CryptoPunk 9y ago
  Token sales are on track to raise over $2 billion worth of cryptocurrency this year, which is more than early-stage VC funding, and most of that for distributed application (mostly blockchain based) development. Given crowd funding through token sales is the first major use-case for cryptocurrency, and is funding numerous cryptocurrency projects, I can't see how one could argue that it is not important to the cryptocurrency sector. Also, almost all token sales are on Ethereum.
  - uberrr 9y ago
    What do you mean by "more than early-stage VC funding"?
    - CryptoPunk 9y ago
      Angel and seed VC funding: http://static2.businessinsider.com/image/598c2fd427fa6b5e17448a25-538/goldman-ico.jpg http://static2.businessinsider.com/image/598c2fd427fa6b5e174...

WikipediasBad 9y ago

This is completely wrong on so many points, I truly doubt that you are even honest about talking to Mr. Villardo. He wouldn't be that stupid to even insinuate something along those lines. Magic the Gathering Trading Cards would be classified as securities by the card printing company with your silly interpretation. After all, they are transferable, the value of the rare cards go up the more popular the game/network becomes, you can't get your money back from the store or the company if you wanted to return your pack of cards, so it's a security? Please. I'd recommend editing your post so you don't come off as clearly clueless.

EGreg 9y ago

Can you please elaborate on this exception: "can be returned for what you paid for it" This seems like a safe harbor if it's true! This is huge. So, an ICO with this clause would require the company to keep all the money raised on reserve, but then if the token goes up in price and never goes back down to the original level they can start using that surplus money. Kind of like a bank does with fractional reserve lending. Do you have any more info on this?

kd5bjo 9y ago
What surplus money? The issuer no longer has the coins, but USD instead. If they make a second offering at a higher price later, they'll need to keep that money in reserve as well or else the new coins will be unregistered securities.
- EGreg 9y ago
  Well, the issuer has USD / BTC whatever but has to keep full reserves to be willing to cash everyone out in a case of a "run on the issuer". This is a worst case scenario and realistically they can probably spend half of the USD / BTC / whatever raised on actually running the business. As the token goes up in price, less and less people will want to buy at the current price. At some point issuer insure themselves against the remote possibility of the price crashing and people making a run on the issuer, by buying out-of-the-money call options if they can find some underwriter. Then the underwriter's issuing the securities, and the issuer can spend some or all of the money protected by the call options / insurance.