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> When do tokens that are securities stop being securities? This is a central question in the token community right now. Our current view is that once the value

> When do tokens that are securities stop being securities? This is a central question in the token community right now. Our current view is that once the value of the tokens is primarily driven by their commercial usage, rather than by the efforts of the token sponsor or other developers, the tokens should no longer be deemed to be securities. The SEC has not yet addressed this question. This has been settled law for 70+ years. When one of the biggest law firms feels the need to preemptively issue a public statement pretending they don't understand how the law works, you know shit is about to get crazy.

olivermarks 9y ago
That 70 year old law is based on financial models that have been settled for far longer though. I hate to use the overhawked term 'disruption' but ICO's appear to be causing major issues amongst the status quo.
- Alex3917 9y ago
  The only innovation that tokens bring to securities is reducing the cost of recording who owns what shares. Which is certainly important, in fact one of the most important innovations since the 1400s, but the idea that this new feature would have any impact whatsoever on the interpretation of our existing securities laws is insane.
  - KasianFranks 9y ago
    No it is not. I ran an OTC co and saw the manipulation first hand. You are incorrect. https://news.ycombinator.com/threads?id=KasianFranks&next=14181080 https://news.ycombinator.com/threads?id=KasianFranks&next=14...
    - Alex3917 9y ago
      I didn't say it eliminates the need for third-party auditing, which it doesn't, only that it reduces the cost.
      - KasianFranks 9y ago
        It not only reduces the cost, it keeps people honest, which is what humans like Jamie Dimon and some investors do not like.
        JumpCrisscross 9y ago
        > which is what humans like Jamie Dimon and some investors do not like There are plenty of people on this thread (myself included) who believe regulators are overdue in cracking down on this space. No need to invoke a bogeyman.
        KasianFranks 9y ago
        They should have cracked down on banks (too big to fail, if you remember) before ICOs and crypto. Lesson learned.
- dragonwriter 9y ago
  > That 70 year old law is based on financial models that have been settled for far longer though No, it's based on the language of a statute that's about a decade older. Now, the statute may be based on older financial models, but that doesn't control the case law, and disrupting the financial model doesn't, in and of itself, amend the statute underlying the case law.
drcode 9y ago
I was saying the same thing when Uber launched- "An Uber is just a Taxi and if they don't follow taxi regulations they will be shut down quickly." I'm still not sure exactly why this didn't happen, but if people can agree that Uber isn't a Taxi, then I think they can also come to the conclusion that an ICO token isn't a traditional security... the world just isn't as black-and-white as we often like to think, and legislators are human beings that have a lot more flexibility around enforcement than people imagine.
- kenbaylor 9y ago
  Funnily enough UberX wasn't the first. Uber was only using licensed Taxi drives for UberBlack, and wanted to do UberX, but knew they'd be shut down immediately. Then Lyft did it....normal people accepting rides. Uber waited for the Lyft shutdown. Didn't happen. Then the city of SF proposed giving Lyft a licence. At that point, Uber pulled out the brakes and that changed their view on regulations permanently. Source---straight from Travis (TK) himself.
- Alex3917 9y ago
  The difference is that Uber wasn't a taxi because they didn't (and still don't) accept street hails. The question around Uber was whether the laws would be changed to make them a taxi, which after much lobbying they weren't, but they were already fine under the existing laws. As kenbaylor says below, Uber themselves thought the laws would quickly be changed to make their business illegal, so they didn't even get into that market until Lyft forced them to do so.
- notyourday 9y ago
  > I was saying the same thing when Uber launched- "An Uber is just a Taxi and if they don't follow taxi regulations they will be shut down quickly." The difference is that Uber was not created to fleece the masses via investment pump and dump scheme. As of now, ICOs are purely pump and dump. They are modern day unregistered securities, promoted via modern day version of faxes
  - iblaine 9y ago
empath75 9y ago
It seems pretty simple: "Is this token being marketed as an investment opportunity?"
- Alex3917 9y ago
  > "Is this token being marketed as an investment opportunity?" Wrong. What matters is whether the person buying the token is doing so because they think it's going to go up in price. The person selling it could explicitly say that it will never be listed on an exchange or go up in value, but if the person buying it thinks it will go up in value, then the person selling it has committed securities fraud. (That's slightly simplified, but that's the general idea.)
  - TaylorGood 9y ago
    More or less, everyone participating in an ICO expects gains. It's not for philanthropic reasons.
    - Alex3917 9y ago
      Sure, which is why basically all of the people running ICOs are now risking prison time.
      - smokeyj 9y ago
        Anyone who's ever touched bitcoin or run a node is risking prison time. It's luck that running a node didn't get your door kicked in by the feds for being an unlicensed money transmitter. At a certain point you just stop caring and hope they can't lock up everyone. Seems to be working so far.
        SlipperySlope 9y ago
        FinCEN addressed that point in guidance years ago. Independent full node operators without sole control of the issuance of the cryptocurrency are not money transmitters.
Animats 9y ago
"Primarily driven by commercial usage". Can anyone name an ICO token for which that is really the case? Filecoin is supposed to have "commercial usage". But the insiders extracted 2/3 of the cash already.[1] As far as I can tell, the "Filecoin Storage Network" doesn't exist. There's no software you can download. You can't actually store data yet. If ever. A key point from WSGR is that if the ICO precedes the service becoming active, it's a security. [1] https://tokeneconomy.co/the-analysis-filecoin-doesnt-want-you-to-read-e60d5243f17c https://tokeneconomy.co/the-analysis-filecoin-doesnt-want-yo...
- Alex3917 9y ago
  > "Primarily driven by commercial usage". Can anyone name an ICO token for which that is really the case? The value of the token can't come primarily from the person or entity promoting the token sale, but whether there is commercial usage or not is largely orthogonal to whether or not something is a security.
  - paulsutter 9y ago
    WSGR disagrees. And where are you finding 70 years of settled law on securities that later become primarily valued via use in commercial transactions? > Our current view is that once the value of the tokens is primarily driven by their commercial usage, rather than by the efforts of the token sponsor or other developers, the tokens should no longer be deemed to be securities. The SEC has not yet addressed this question.
    - Alex3917 9y ago
      The Howey Test, from 1946, is about whether assets that are classified as real estate, currencies, 'utility tokens', etc., can also be classified as securities. http://consumer.findlaw.com/securities-law/what-is-the-howey-test.html http://consumer.findlaw.com/securities-law/what-is-the-howey... The entire point is that you can't get out of going to prison by saying "Our thing is X, therefore it can't also be Y."
      - 9y ago

olivermarks 9y ago

That 70 year old law is based on financial models that have been settled for far longer though. I hate to use the overhawked term 'disruption' but ICO's appear to be causing major issues amongst the status quo.

Alex3917 9y ago
The only innovation that tokens bring to securities is reducing the cost of recording who owns what shares. Which is certainly important, in fact one of the most important innovations since the 1400s, but the idea that this new feature would have any impact whatsoever on the interpretation of our existing securities laws is insane.
- KasianFranks 9y ago
  No it is not. I ran an OTC co and saw the manipulation first hand. You are incorrect. https://news.ycombinator.com/threads?id=KasianFranks&next=14181080 https://news.ycombinator.com/threads?id=KasianFranks&next=14...
  - Alex3917 9y ago
    I didn't say it eliminates the need for third-party auditing, which it doesn't, only that it reduces the cost.
    - KasianFranks 9y ago
      It not only reduces the cost, it keeps people honest, which is what humans like Jamie Dimon and some investors do not like.
      - JumpCrisscross 9y ago
        > which is what humans like Jamie Dimon and some investors do not like There are plenty of people on this thread (myself included) who believe regulators are overdue in cracking down on this space. No need to invoke a bogeyman.
        KasianFranks 9y ago
        They should have cracked down on banks (too big to fail, if you remember) before ICOs and crypto. Lesson learned.
dragonwriter 9y ago
> That 70 year old law is based on financial models that have been settled for far longer though No, it's based on the language of a statute that's about a decade older. Now, the statute may be based on older financial models, but that doesn't control the case law, and disrupting the financial model doesn't, in and of itself, amend the statute underlying the case law.

drcode 9y ago

I was saying the same thing when Uber launched- "An Uber is just a Taxi and if they don't follow taxi regulations they will be shut down quickly." I'm still not sure exactly why this didn't happen, but if people can agree that Uber isn't a Taxi, then I think they can also come to the conclusion that an ICO token isn't a traditional security... the world just isn't as black-and-white as we often like to think, and legislators are human beings that have a lot more flexibility around enforcement than people imagine.

kenbaylor 9y ago
Funnily enough UberX wasn't the first. Uber was only using licensed Taxi drives for UberBlack, and wanted to do UberX, but knew they'd be shut down immediately. Then Lyft did it....normal people accepting rides. Uber waited for the Lyft shutdown. Didn't happen. Then the city of SF proposed giving Lyft a licence. At that point, Uber pulled out the brakes and that changed their view on regulations permanently. Source---straight from Travis (TK) himself.
Alex3917 9y ago
The difference is that Uber wasn't a taxi because they didn't (and still don't) accept street hails. The question around Uber was whether the laws would be changed to make them a taxi, which after much lobbying they weren't, but they were already fine under the existing laws. As kenbaylor says below, Uber themselves thought the laws would quickly be changed to make their business illegal, so they didn't even get into that market until Lyft forced them to do so.
notyourday 9y ago
> I was saying the same thing when Uber launched- "An Uber is just a Taxi and if they don't follow taxi regulations they will be shut down quickly." The difference is that Uber was not created to fleece the masses via investment pump and dump scheme. As of now, ICOs are purely pump and dump. They are modern day unregistered securities, promoted via modern day version of faxes
- iblaine 9y ago

empath75 9y ago

It seems pretty simple: "Is this token being marketed as an investment opportunity?"

Alex3917 9y ago
> "Is this token being marketed as an investment opportunity?" Wrong. What matters is whether the person buying the token is doing so because they think it's going to go up in price. The person selling it could explicitly say that it will never be listed on an exchange or go up in value, but if the person buying it thinks it will go up in value, then the person selling it has committed securities fraud. (That's slightly simplified, but that's the general idea.)
- TaylorGood 9y ago
  More or less, everyone participating in an ICO expects gains. It's not for philanthropic reasons.
  - Alex3917 9y ago
    Sure, which is why basically all of the people running ICOs are now risking prison time.
    - smokeyj 9y ago
      Anyone who's ever touched bitcoin or run a node is risking prison time. It's luck that running a node didn't get your door kicked in by the feds for being an unlicensed money transmitter. At a certain point you just stop caring and hope they can't lock up everyone. Seems to be working so far.
      - SlipperySlope 9y ago
        FinCEN addressed that point in guidance years ago. Independent full node operators without sole control of the issuance of the cryptocurrency are not money transmitters.

Animats 9y ago

"Primarily driven by commercial usage". Can anyone name an ICO token for which that is really the case? Filecoin is supposed to have "commercial usage". But the insiders extracted 2/3 of the cash already.[1] As far as I can tell, the "Filecoin Storage Network" doesn't exist. There's no software you can download. You can't actually store data yet. If ever. A key point from WSGR is that if the ICO precedes the service becoming active, it's a security. [1] https://tokeneconomy.co/the-analysis-filecoin-doesnt-want-you-to-read-e60d5243f17c https://tokeneconomy.co/the-analysis-filecoin-doesnt-want-yo...

Alex3917 9y ago
> "Primarily driven by commercial usage". Can anyone name an ICO token for which that is really the case? The value of the token can't come primarily from the person or entity promoting the token sale, but whether there is commercial usage or not is largely orthogonal to whether or not something is a security.
- paulsutter 9y ago
  WSGR disagrees. And where are you finding 70 years of settled law on securities that later become primarily valued via use in commercial transactions? > Our current view is that once the value of the tokens is primarily driven by their commercial usage, rather than by the efforts of the token sponsor or other developers, the tokens should no longer be deemed to be securities. The SEC has not yet addressed this question.
  - Alex3917 9y ago
    The Howey Test, from 1946, is about whether assets that are classified as real estate, currencies, 'utility tokens', etc., can also be classified as securities. http://consumer.findlaw.com/securities-law/what-is-the-howey-test.html http://consumer.findlaw.com/securities-law/what-is-the-howey... The entire point is that you can't get out of going to prison by saying "Our thing is X, therefore it can't also be Y."
    - 9y ago