4 ms·

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 d

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-...
  - DennisP 7y ago
    Thanks. So since cryptocurrencies aren't specifically listed but just fall under "investment contracts," and investment contracts have to pass Howey to be considered securities, doesn't that mean that cryptocurrencies which fail a Howey test are in the clear? (I guess the SEC could claim they count as "any interest or instrument commonly known as a security" on the grounds that the SEC themselves consider them securities, but that seems a stretch. I don't know why the courts would have bothered making the Howey test if they just wanted the SEC to rule however it liked.)
    - elliekelly 7y ago
      > doesn't that mean that cryptocurrencies which fail a Howey test are in the clear? Correct. Though I get the impression you think most tokens fail Howey and I’m not sure that’s the case. In SEC v Lauer the court found a “common enterprise” where there was only one investor so the court’s application of the Howey test isn’t cut and dry but there’s an expectation the court will apply it to the specific circumstances at issue.
      - seibelj 7y ago
        I think it won't be such a cut-and-dry case to say that a token, given for free, without any promises of dividends or equity, run on a decentralized network, is a straightforward security which should be registered and regulated by the SEC. The Kik case may be a security but other cryptos are nowhere near as clear.
        elliekelly 7y ago
        Yes but I suppose that’s the risk Kik is taking for the entire industry whether the rest of crypto is ready or not. A bunch of judges who hardly understand what cryptocurrency is, let alone how it works, will very likely come up with a new test to determine whether a digital asset is a security. That test might be very narrowly tailored to the specific facts and circumstances of the kik case or it might be very broadly constructed so as to sweep in far more tokens than even the SEC intended. Rather than simply waiting for the SEC and industry to organically work through the confusion Kik is taking a big legal risk because their back is against the wall. But the risk they’re taking has the potential to negatively impact many others. I’m hopeful that, whatever the outcome for Kik, Congress will amend the definition to provide everyone with some clarity one way or the other.

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-...
- DennisP 7y ago
  Thanks. So since cryptocurrencies aren't specifically listed but just fall under "investment contracts," and investment contracts have to pass Howey to be considered securities, doesn't that mean that cryptocurrencies which fail a Howey test are in the clear? (I guess the SEC could claim they count as "any interest or instrument commonly known as a security" on the grounds that the SEC themselves consider them securities, but that seems a stretch. I don't know why the courts would have bothered making the Howey test if they just wanted the SEC to rule however it liked.)
  - elliekelly 7y ago
    > doesn't that mean that cryptocurrencies which fail a Howey test are in the clear? Correct. Though I get the impression you think most tokens fail Howey and I’m not sure that’s the case. In SEC v Lauer the court found a “common enterprise” where there was only one investor so the court’s application of the Howey test isn’t cut and dry but there’s an expectation the court will apply it to the specific circumstances at issue.
    - seibelj 7y ago
      I think it won't be such a cut-and-dry case to say that a token, given for free, without any promises of dividends or equity, run on a decentralized network, is a straightforward security which should be registered and regulated by the SEC. The Kik case may be a security but other cryptos are nowhere near as clear.
      - elliekelly 7y ago
        Yes but I suppose that’s the risk Kik is taking for the entire industry whether the rest of crypto is ready or not. A bunch of judges who hardly understand what cryptocurrency is, let alone how it works, will very likely come up with a new test to determine whether a digital asset is a security. That test might be very narrowly tailored to the specific facts and circumstances of the kik case or it might be very broadly constructed so as to sweep in far more tokens than even the SEC intended. Rather than simply waiting for the SEC and industry to organically work through the confusion Kik is taking a big legal risk because their back is against the wall. But the risk they’re taking has the potential to negatively impact many others. I’m hopeful that, whatever the outcome for Kik, Congress will amend the definition to provide everyone with some clarity one way or the other.