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First clause of the Howey Test is that there's an investment of money. Perhaps at some point the SEC lawyers will argue to a court that something can still be a

First clause of the Howey Test is that there's an investment of money. Perhaps at some point the SEC lawyers will argue to a court that something can still be a security without an investment of money, but I don't think there's any particular reason to think a court will agree.

elliekelly 7y ago
You're conflating the definition of a "security" under the Securities Act with the definition of an "investment contract" (undefined in the Securities Act and defined by the court in Howey). An "investment contract" is just one of many things that fall within the definition of "security": > The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, 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 interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Source: https://www.law.cornell.edu/uscode/text/15/77b https://www.law.cornell.edu/uscode/text/15/77b
- DennisP 7y ago
  Can you give an example of something that fails the Howey test, but is required to follow the SEC regulations that govern ICOs?
  - elliekelly 7y ago
    A few things to clarify: The SEC's position is that tokens are "securities" under the Securities Act and the Securities Act says that all securities must be registered if they're going to be sold to the public. Since the SEC views the tokens as securities (no different from company stock), and securities must be registered to be sold to the public, then (according to the SEC) an ICO of an unregistered token violates securities regulations. To that end, the SEC hasn't issued "regulations that govern ICOs" they've issued guidance as to how the _existing_ securities regulations apply to tokens and ICOs. The rules haven't changed, the SEC has just attempted to make it clear that the rules do apply even though they haven't necessarily been enforced. That guidance has come in the form of a statement for ICO issuers[1], a 'Framework for "Investment Contract" Analysis of Digital Assets'[2], and a statement on cryptocurrencies and ICOs[3]. All three include language along the lines of: > This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission. As I mentioned in my comment above, the definition of "security" includes a lot of situations. The Howey test only applies to _one_ of those situations: investment contracts. Since "investment contracts" are a type of "security" an investment contract is subject to all of the same rules and regulations as any other security. Investment contracts are sort of the catch all category in the definition of "security" and why you'll often hear the term come up with respect to cryptocurrency because cryptocurrency is not specifically included in the statutory definition of "security." Many types of securities fail the Howey test because they aren't "investment contracts" but they are still a "security" and still subject to the same regulations. For example, employee stock options fail the Howey test because they aren't "an investment of money" and because profits aren't expected "solely from the efforts of a third party." But the Howey test would never be applied to employee stock options because we know "options" and "stock" and "profit-sharing agreement" are all specifically included in the definition of "security." So it doesn't really matter whether employee stock options are an investment contract - they're still subject to the same regulations. [1] https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets https://www.sec.gov/news/public-statement/statement-framewor... [2] https://www.sec.gov/files/dlt-framework.pdf https://www.sec.gov/files/dlt-framework.pdf [3] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 https://www.sec.gov/news/public-statement/statement-clayton-...
berberous 7y ago
The Securities Act prevents the offer or sale of a security for "value" -- and there is precedent that giving away free securities can still be an offer of securities for "value". See this 1999 SEC press release: https://www.sec.gov/news/headlines/webstock.htm https://www.sec.gov/news/headlines/webstock.htm Whether something passes the Howey test and is deemed a security is a different matter, but you can "airdrop" a clear security (which certain cryptocurrencies certainly are), and violate Section 5 of the Securities Act notwithstanding the fact that the value to the issuer was not cash.
- DennisP 7y ago
  In the cases described at that link, "the investors were required to sign up with the issuers' web sites and disclose valuable personal information in order to obtain shares. Free stock recipients were also offered extra shares, in some cases, for soliciting additional investors or, in other cases, for linking their own websites to those of an issuer or purchasing services offered through an issuer." The airdropped tokens I've seen did none of those things. Someone simply created a token contract and granted initial balances based on the ETH balances of existing addresses. The new owners don't even have to know the tokens exist.

elliekelly 7y ago

You're conflating the definition of a "security" under the Securities Act with the definition of an "investment contract" (undefined in the Securities Act and defined by the court in Howey). An "investment contract" is just one of many things that fall within the definition of "security": > The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, 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 interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Source: https://www.law.cornell.edu/uscode/text/15/77b https://www.law.cornell.edu/uscode/text/15/77b

DennisP 7y ago
Can you give an example of something that fails the Howey test, but is required to follow the SEC regulations that govern ICOs?
- elliekelly 7y ago
  A few things to clarify: The SEC's position is that tokens are "securities" under the Securities Act and the Securities Act says that all securities must be registered if they're going to be sold to the public. Since the SEC views the tokens as securities (no different from company stock), and securities must be registered to be sold to the public, then (according to the SEC) an ICO of an unregistered token violates securities regulations. To that end, the SEC hasn't issued "regulations that govern ICOs" they've issued guidance as to how the _existing_ securities regulations apply to tokens and ICOs. The rules haven't changed, the SEC has just attempted to make it clear that the rules do apply even though they haven't necessarily been enforced. That guidance has come in the form of a statement for ICO issuers[1], a 'Framework for "Investment Contract" Analysis of Digital Assets'[2], and a statement on cryptocurrencies and ICOs[3]. All three include language along the lines of: > This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission. As I mentioned in my comment above, the definition of "security" includes a lot of situations. The Howey test only applies to _one_ of those situations: investment contracts. Since "investment contracts" are a type of "security" an investment contract is subject to all of the same rules and regulations as any other security. Investment contracts are sort of the catch all category in the definition of "security" and why you'll often hear the term come up with respect to cryptocurrency because cryptocurrency is not specifically included in the statutory definition of "security." Many types of securities fail the Howey test because they aren't "investment contracts" but they are still a "security" and still subject to the same regulations. For example, employee stock options fail the Howey test because they aren't "an investment of money" and because profits aren't expected "solely from the efforts of a third party." But the Howey test would never be applied to employee stock options because we know "options" and "stock" and "profit-sharing agreement" are all specifically included in the definition of "security." So it doesn't really matter whether employee stock options are an investment contract - they're still subject to the same regulations. [1] https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets https://www.sec.gov/news/public-statement/statement-framewor... [2] https://www.sec.gov/files/dlt-framework.pdf https://www.sec.gov/files/dlt-framework.pdf [3] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 https://www.sec.gov/news/public-statement/statement-clayton-...

berberous 7y ago

The Securities Act prevents the offer or sale of a security for "value" -- and there is precedent that giving away free securities can still be an offer of securities for "value". See this 1999 SEC press release: https://www.sec.gov/news/headlines/webstock.htm https://www.sec.gov/news/headlines/webstock.htm Whether something passes the Howey test and is deemed a security is a different matter, but you can "airdrop" a clear security (which certain cryptocurrencies certainly are), and violate Section 5 of the Securities Act notwithstanding the fact that the value to the issuer was not cash.

DennisP 7y ago
In the cases described at that link, "the investors were required to sign up with the issuers' web sites and disclose valuable personal information in order to obtain shares. Free stock recipients were also offered extra shares, in some cases, for soliciting additional investors or, in other cases, for linking their own websites to those of an issuer or purchasing services offered through an issuer." The airdropped tokens I've seen did none of those things. Someone simply created a token contract and granted initial balances based on the ETH balances of existing addresses. The new owners don't even have to know the tokens exist.