13 ms·

This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as de

This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?

elmar 9y ago
I would dare to say that even Ethereum and some other alt-coins should be considered securities using this test.
- tptacek 9y ago
  Sure, they could be.
- anonymous5133 9y ago
  Most are. Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec.
  - shafyy 9y ago
    Do you think it's better for the economy overall if they are not regulated by the SEC?
  - vkou 9y ago
    Most countries have securities laws that are similar to those of the United States. It's arguably easier to be in compliance in a single market of 350 million people, then in multiple markets, each governed by their own laws.
  - krrrh 9y ago
    There’s an assumption being made that the SEC has a vastly different way of looking at investor protection than securities regulators in other jusrisdicions. I’m sure there will be some regulatory arbitrage going on, but if an ICO is a security it doesn’t make it automatically illegal, it just means they have to follow rules established that are mostly there to legally bind the organization to disclose information to investors and follow certain governance standards. Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.
  - gamblor956 9y ago
    It wouldn't matter if they're located outside the US. The SEC has jurisdiction over all securities that are sold to US persons, and most countries where you'd want to be located have similar laws.
  - jmalicki 9y ago
    Sometimes they're commodities, not securities, depending on the particulars of the transaction (still regulated, just a different set of regulations) https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocurrency-regulation/ https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocur...
  - spookthesunset 9y ago
    > Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec. So they can all run their scams in countries that don't care? I mean, doesn't this just show that crypto startups are all about providing services to entities that, for various reasons, do not / cannot participate in the aboveground economy? Like, what reputable, real company would have any problem existing inside the USA's jurisdiction? You could argue drug trade, which is supposedly a "victimless crime" (note: it isn't... depending on the drug, even "non-violent" drug use can fuck over a lot of people outside just the person who choses to take said drug (eg: meth, herion, oxy, etc...)). Anything else though, it is almost certainly a scammer scamming people. Why should above ground society tolerate people wanting to run ponzi schemes, people trying to cash out crypto-ransomware revenue, or people who want to deal in murder-for-hire?
jMyles 9y ago
Imagine it's a network-connected resource like server time or file hosting. Those aren't securities right? So now just imagine a token that has the same functionality. You receive a token that does something useful. Do you use that token wisely? Or do you make bad business decisions? There are tokens that people are buying to use, not just to HODL.
- yazaddaruvala 9y ago
  Imagine a piece of paper. Like what you'd find in a notebook. Those aren't assets right? So now just imagine a token that has the same functionality. You receive a token, it's made of paper like the notebook but does something useful. Should that token, the piece of paper be regulated? Lol yes, it's now money! And all other assets or securities are regulated.
  - debacle 9y ago
    Paper has utility outside of its value. Most coins do not.
    - crankylinuxuser 9y ago
      I'd counter specifically with Ethereum or Filecoin. They both represent either computation-time or file-storage-and-bandwidth time. Ethereum could easily represent time on a distributed AWS Lambda. And FileCoin can represent an AWS S3 storage. It just so happens that they both are also cryptocoin. It gets even uglier that the turning-like machine in Ethereum/Solidity also exists, kind of, in Bitcoin. In fact it was because it worked in Bitcoin they developed Ethereum. So technically even Bitcoin can do processing work. Makes everything a bit murkier to be honest.
      - debacle 9y ago
        You're not countering anything. I'm aware of both. The SEC is going to have to decide if these coins having utilities makes up their value. These aren't new concepts. People have been trying to get around regulation for thousands of years.
nostrademons 9y ago
A pure payment system within an app. Say that someone builds a social network that lets you easily get in touch with people who have need of skills that you possess. They then introduce a token system - call it "karma", maybe - that you can grant to people who perform good deeds for you, and then if your karma is positive, you can grant it to others in exchange for favors or services. Since you only receive karma for actions you perform and it doesn't rise in value based on the efforts of the social network, it's not a security. It is a currency, however, and could fall afoul of laws governing currencies. BTW, a number of games successfully have things like this, eg. Linden dollars in Second Life, gold in WoW, or tokens in FarmVille.
- tonysdg 9y ago
  Isn't that exactly how bounties work on the StackExchange websites?
- philipodonnell 9y ago
  > Since you only receive karma for actions you perform That wouldn't really be an ICO, though, right? You have to be able to convert it back and forth between another currency, not just "earning" it through use of the software to be spent only there and never changing hands.
  - detaro 9y ago
    You could bootstrap initial distribution through an ICO (e.g. if people need an initial stock to be able to distribute it to others). And e.g. in-game currency commonly can be bought, but not sold through official channels.
    - collinmanderson 9y ago
      Right. The key difference is you're not allowed to sell in-game/app money for USD.
paulmd 9y ago
> This seems, to me (a layman), to indicate that most any ICO will fall under "security." Pretty much, yes. Securities are defined very broadly in the US. Why does it surprise you that these are securities? They very obviously are selling a security to investors, who are purchasing it because they expect the price to increase. Open-and-shut case. The fact that there's crypto involved is irrelevant. It really sounds like people are trying to pretend these laws don't apply because they disagree with the laws in question. Which is fine, but let's not pretend like there's any ambiguity here, because there's not. It's extremely clear that almost all ICOs are securities, and if you asked a lawyer I'm 100% sure that's what they would tell you.
- michwill 9y ago
  You're not correct. I think, less than 50% of ICOs are not securities. But the way to prove is exactly this: ask a lawyer
  - dc_gregory 9y ago
    I think if you hold a non-obvious position like this, it'd be great to explain your reasoning. I am def. curious as to what you think here!
TDL 9y ago
The SEC Chairman released a statement this morning about cryptos & ICOs. There is a mention of how an ICO can fall outside of the securities designation in the memo. https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 https://www.sec.gov/news/public-statement/statement-clayton-...
- Sangermaine 9y ago
  The Chairman just reiterates what's long been the case in securities law: whether an ICO, like any other instrument, is a security depends on the facts of the case.
michwill 9y ago
I don't think you're right. Under this impression, most of cryptocurrencies are securities. However, SEC said, they're not: https://twitter.com/mikebutcher/status/940487575491497985 https://twitter.com/mikebutcher/status/940487575491497985
- Alex3917 9y ago
  "It has been asserted", i.e. that assertion is false and most ICOs are securities.
  - deleted 9y ago
    [deleted]
  - michwill 9y ago
    https://www.technologyreview.com/the-download/609756/as-it-turns-out-the-sec-doesnt-completely-hate-icos/ https://www.technologyreview.com/the-download/609756/as-it-t...
oskarth 9y ago
Interestingly, cash would seem to be a security under this definition. Except it is explicitly exempted: > The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. From The Securities Exchange Act of 1934 (N.B. IANAL). So, will cryptocurrencies, possibly including ICOs, be exempted? Only history will tell.
- stale2002 9y ago
  Nobody is saying that crytocurrencies 'in general' are going to be declared securities. This is about ICOs. IE, a tokens that are a 'FUTURE' promise for something that doesn't exist yet. If Bitcoin was a security, the statement from the SEC head would be very different.
  - oskarth 9y ago
    > Nobody is saying that crytocurrencies 'in general' are going to be declared securities. I agree with you, but the fact is plenty of people do. Maybe not in the corner of the world, but look broader. This also wasn't the point.
  - deleted 9y ago
    [deleted]
- 9y ago
Lazare 9y ago
Most ICOs are probably securities, yes. > Can anyone provide an example where an ICO would not be a security Well, if it's purely a "utility coin", and people are buying it in order to exchange the coin for some service (like, basically, car wash tokens but on the internet), and there's not really any speculation in the secondary market, and people are buying them for their own use and not to resell or speculate on, it's probably fine. On the other hand, if the product that the coins would be used for hasn't been built yet, it's probably not fine (since you're gambling on the founders executing properly, yet have no real control over whether they do so). ...but no, I don't know of any examples that fit that criteria. ICOs don't make a lot of sense for things that aren't securities; the most common purpose (at least for the legit, non-fraudulent ones) is to obtain investment to build a product. That's obviously a security, and one of the core purposes of securities law is to protect people being asked to contribute an investment that will be used to build a product.
ianamartin 9y ago
I think that EvE Online's market has passed this test. It's not an ICO, but it is an online currency that is purchased with real currency and gets traded on, speculated on, used to buy things, and accepted when selling things. And the key point is that an investor in EvE ISK is at the mercy of CCP for how they inject money into the game. You can speculate, for example, that pirate faction battleships are about to go up in price. CCP can and does change that all the time. The investor has no insight or control over how ISK is valued. What keeps it different and unregulated is that it's a one-way conversion. You can buy things with real cash that can be sold for in-game currency. But you cannot, in theory, sell anything inside of the game for real-world cash. Some people do, of course, but CCP polices this very heavily to avoid exactly this kind of problem. Virtual game currencies are not that different from Coins. But the main reason they escape scrutiny by regulatory bodies is that they are one-way conversions. ICOs were, until very recently, one-way conversions. You buy something from someone, good for you. Once it got to a point where it was relatively easy to convert that virtual thing back into legit currency, people started paying attention. I can't see a way that any new ICOs can dodge this aspect. But there were COs that did dodge it for a while because no one thought they could get big enough to matter. If RMT got big enough in EvE or any other video game that offers financial incentives to win at the game (so-called pay-to-win) ever got big enough to be able to affect a currency market, they would fall into this scrutiny almost immediately, which is why gaming companies police this so hard. There isn't really any functional difference between trading game tokens and trading blockchain coins, except that one is easily transferable to real-world currency and the other is not. So in that very round-about way, any virtual currency that is seen by the FTC to be one-way will not pass the Howey Test. But almost all virtual game currencies can be traded in one way or another for real currency. Most of them can't be done in a large enough scale to affect real currency, so no one cares. Most in-game currencies should fail the test. But they are irrelevant, so they pass.

This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?

elmar 9y ago

I would dare to say that even Ethereum and some other alt-coins should be considered securities using this test.

tptacek 9y ago
Sure, they could be.
anonymous5133 9y ago
Most are. Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec.
- shafyy 9y ago
  Do you think it's better for the economy overall if they are not regulated by the SEC?
- vkou 9y ago
  Most countries have securities laws that are similar to those of the United States. It's arguably easier to be in compliance in a single market of 350 million people, then in multiple markets, each governed by their own laws.
- krrrh 9y ago
  There’s an assumption being made that the SEC has a vastly different way of looking at investor protection than securities regulators in other jusrisdicions. I’m sure there will be some regulatory arbitrage going on, but if an ICO is a security it doesn’t make it automatically illegal, it just means they have to follow rules established that are mostly there to legally bind the organization to disclose information to investors and follow certain governance standards. Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.
- gamblor956 9y ago
  It wouldn't matter if they're located outside the US. The SEC has jurisdiction over all securities that are sold to US persons, and most countries where you'd want to be located have similar laws.
- jmalicki 9y ago
  Sometimes they're commodities, not securities, depending on the particulars of the transaction (still regulated, just a different set of regulations) https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocurrency-regulation/ https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocur...
- spookthesunset 9y ago
  > Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec. So they can all run their scams in countries that don't care? I mean, doesn't this just show that crypto startups are all about providing services to entities that, for various reasons, do not / cannot participate in the aboveground economy? Like, what reputable, real company would have any problem existing inside the USA's jurisdiction? You could argue drug trade, which is supposedly a "victimless crime" (note: it isn't... depending on the drug, even "non-violent" drug use can fuck over a lot of people outside just the person who choses to take said drug (eg: meth, herion, oxy, etc...)). Anything else though, it is almost certainly a scammer scamming people. Why should above ground society tolerate people wanting to run ponzi schemes, people trying to cash out crypto-ransomware revenue, or people who want to deal in murder-for-hire?

jMyles 9y ago

Imagine it's a network-connected resource like server time or file hosting. Those aren't securities right? So now just imagine a token that has the same functionality. You receive a token that does something useful. Do you use that token wisely? Or do you make bad business decisions? There are tokens that people are buying to use, not just to HODL.

yazaddaruvala 9y ago
Imagine a piece of paper. Like what you'd find in a notebook. Those aren't assets right? So now just imagine a token that has the same functionality. You receive a token, it's made of paper like the notebook but does something useful. Should that token, the piece of paper be regulated? Lol yes, it's now money! And all other assets or securities are regulated.
- debacle 9y ago
  Paper has utility outside of its value. Most coins do not.
  - crankylinuxuser 9y ago
    I'd counter specifically with Ethereum or Filecoin. They both represent either computation-time or file-storage-and-bandwidth time. Ethereum could easily represent time on a distributed AWS Lambda. And FileCoin can represent an AWS S3 storage. It just so happens that they both are also cryptocoin. It gets even uglier that the turning-like machine in Ethereum/Solidity also exists, kind of, in Bitcoin. In fact it was because it worked in Bitcoin they developed Ethereum. So technically even Bitcoin can do processing work. Makes everything a bit murkier to be honest.
    - debacle 9y ago
      You're not countering anything. I'm aware of both. The SEC is going to have to decide if these coins having utilities makes up their value. These aren't new concepts. People have been trying to get around regulation for thousands of years.

nostrademons 9y ago

A pure payment system within an app. Say that someone builds a social network that lets you easily get in touch with people who have need of skills that you possess. They then introduce a token system - call it "karma", maybe - that you can grant to people who perform good deeds for you, and then if your karma is positive, you can grant it to others in exchange for favors or services. Since you only receive karma for actions you perform and it doesn't rise in value based on the efforts of the social network, it's not a security. It is a currency, however, and could fall afoul of laws governing currencies. BTW, a number of games successfully have things like this, eg. Linden dollars in Second Life, gold in WoW, or tokens in FarmVille.

tonysdg 9y ago
Isn't that exactly how bounties work on the StackExchange websites?
philipodonnell 9y ago
> Since you only receive karma for actions you perform That wouldn't really be an ICO, though, right? You have to be able to convert it back and forth between another currency, not just "earning" it through use of the software to be spent only there and never changing hands.
- detaro 9y ago
  You could bootstrap initial distribution through an ICO (e.g. if people need an initial stock to be able to distribute it to others). And e.g. in-game currency commonly can be bought, but not sold through official channels.
  - collinmanderson 9y ago
    Right. The key difference is you're not allowed to sell in-game/app money for USD.

paulmd 9y ago

> This seems, to me (a layman), to indicate that most any ICO will fall under "security." Pretty much, yes. Securities are defined very broadly in the US. Why does it surprise you that these are securities? They very obviously are selling a security to investors, who are purchasing it because they expect the price to increase. Open-and-shut case. The fact that there's crypto involved is irrelevant. It really sounds like people are trying to pretend these laws don't apply because they disagree with the laws in question. Which is fine, but let's not pretend like there's any ambiguity here, because there's not. It's extremely clear that almost all ICOs are securities, and if you asked a lawyer I'm 100% sure that's what they would tell you.

michwill 9y ago
You're not correct. I think, less than 50% of ICOs are not securities. But the way to prove is exactly this: ask a lawyer
- dc_gregory 9y ago
  I think if you hold a non-obvious position like this, it'd be great to explain your reasoning. I am def. curious as to what you think here!

TDL 9y ago

The SEC Chairman released a statement this morning about cryptos & ICOs. There is a mention of how an ICO can fall outside of the securities designation in the memo. https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 https://www.sec.gov/news/public-statement/statement-clayton-...

Sangermaine 9y ago
The Chairman just reiterates what's long been the case in securities law: whether an ICO, like any other instrument, is a security depends on the facts of the case.

michwill 9y ago

I don't think you're right. Under this impression, most of cryptocurrencies are securities. However, SEC said, they're not: https://twitter.com/mikebutcher/status/940487575491497985 https://twitter.com/mikebutcher/status/940487575491497985

Alex3917 9y ago
"It has been asserted", i.e. that assertion is false and most ICOs are securities.
- deleted 9y ago
  [deleted]
- michwill 9y ago
  https://www.technologyreview.com/the-download/609756/as-it-turns-out-the-sec-doesnt-completely-hate-icos/ https://www.technologyreview.com/the-download/609756/as-it-t...

oskarth 9y ago

Interestingly, cash would seem to be a security under this definition. Except it is explicitly exempted: > The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. From The Securities Exchange Act of 1934 (N.B. IANAL). So, will cryptocurrencies, possibly including ICOs, be exempted? Only history will tell.

stale2002 9y ago
Nobody is saying that crytocurrencies 'in general' are going to be declared securities. This is about ICOs. IE, a tokens that are a 'FUTURE' promise for something that doesn't exist yet. If Bitcoin was a security, the statement from the SEC head would be very different.
- oskarth 9y ago
  > Nobody is saying that crytocurrencies 'in general' are going to be declared securities. I agree with you, but the fact is plenty of people do. Maybe not in the corner of the world, but look broader. This also wasn't the point.
- deleted 9y ago
  [deleted]
9y ago

Lazare 9y ago

Most ICOs are probably securities, yes. > Can anyone provide an example where an ICO would not be a security Well, if it's purely a "utility coin", and people are buying it in order to exchange the coin for some service (like, basically, car wash tokens but on the internet), and there's not really any speculation in the secondary market, and people are buying them for their own use and not to resell or speculate on, it's probably fine. On the other hand, if the product that the coins would be used for hasn't been built yet, it's probably not fine (since you're gambling on the founders executing properly, yet have no real control over whether they do so). ...but no, I don't know of any examples that fit that criteria. ICOs don't make a lot of sense for things that aren't securities; the most common purpose (at least for the legit, non-fraudulent ones) is to obtain investment to build a product. That's obviously a security, and one of the core purposes of securities law is to protect people being asked to contribute an investment that will be used to build a product.

ianamartin 9y ago

I think that EvE Online's market has passed this test. It's not an ICO, but it is an online currency that is purchased with real currency and gets traded on, speculated on, used to buy things, and accepted when selling things. And the key point is that an investor in EvE ISK is at the mercy of CCP for how they inject money into the game. You can speculate, for example, that pirate faction battleships are about to go up in price. CCP can and does change that all the time. The investor has no insight or control over how ISK is valued. What keeps it different and unregulated is that it's a one-way conversion. You can buy things with real cash that can be sold for in-game currency. But you cannot, in theory, sell anything inside of the game for real-world cash. Some people do, of course, but CCP polices this very heavily to avoid exactly this kind of problem. Virtual game currencies are not that different from Coins. But the main reason they escape scrutiny by regulatory bodies is that they are one-way conversions. ICOs were, until very recently, one-way conversions. You buy something from someone, good for you. Once it got to a point where it was relatively easy to convert that virtual thing back into legit currency, people started paying attention. I can't see a way that any new ICOs can dodge this aspect. But there were COs that did dodge it for a while because no one thought they could get big enough to matter. If RMT got big enough in EvE or any other video game that offers financial incentives to win at the game (so-called pay-to-win) ever got big enough to be able to affect a currency market, they would fall into this scrutiny almost immediately, which is why gaming companies police this so hard. There isn't really any functional difference between trading game tokens and trading blockchain coins, except that one is easily transferable to real-world currency and the other is not. So in that very round-about way, any virtual currency that is seen by the FTC to be one-way will not pass the Howey Test. But almost all virtual game currencies can be traded in one way or another for real currency. Most of them can't be done in a large enough scale to affect real currency, so no one cares. Most in-game currencies should fail the test. But they are irrelevant, so they pass.