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The purchase of the cards is not engaging in a common enterprise with the Pokemon show and the efforts of others aren't the cause of the rise in prices.

EGreg 3y ago
If not for the show, the cards wouldn’t be worth as much. The show is what is spreading the memes and driving the demand for show related merchandise. That IS the business model! It sounds like your whole defense would hinge on hoping the SEC won’t be able to convince a court that it’s a common enterprise. I looked it up and “common enterprise” is not very well defined in either statutory law nor case law. I have been over this with many people and made them realize that you can’t possibly predict “this isn’t a common enterprise” defense would work in a court or law. SEC has argued many novel concepts, just this year with LBRY for instance. And they were successful. If they want to say it was a common enterprise, and the term is not even well defined, then they will make a strong case. It’s not up to you reading your own opinions into definitions, it’s whether a judge or jury makes a decision in a case, and / or whether the SEC exercises their restraint.
- joshuamorton 3y ago
  > The show is what is spreading the memes and driving the demand for show related merchandise. That IS the business model! I'm actually not sure how true this is. Given that there are non-pokemon examples (like magic: the gathering) that don't have cross-branding, and there exists a competitive pokemon TCG scene independent of the show, and the cards maintain a secondary market value as long as people want to play kitchen-table or collect them as collectibles, which will be true independent of the success of the Pokemon company, the common enterprise thing falls apart. I don't purchase pokemon cards as an investment in The Pokemon Company^tm with the expectation of profit. I purchase them as a toy to entertain me. That fails prong two and three. That a secondary market exists, and that particular objects have a high secondary-market value doesn't make the whole thing a common enterprise for profit, and I really doubt the majority of pokemon card purchasers do so with the intent to profit, same with MTG. Most people want some cool cards and entertainment, and throw them away. (And this is backed up by data: with MTG, which has astronomically higher demand and card prices than pokemon, their market research shows that, by far, their largest consumer segment is entirely casual players who never attend sanctioned events. They buy packs or precons. So concepts like the secondary market value are immaterial for the majority of the consumers)
  - EGreg 3y ago
    Sorry but it's not about what you do. Even if it fails prong 2 and 3 for you, the SEC can still successfully argue that the vast majority of sales are securities. This was the dangerous precedent set in their victory over LBRY in December 2022. They argued that if at least some people bought the utility tokens with expectation of profit, then the utility token sales were securities -- and the judge bought it! https://www.ropesgray.com/en/newsroom/alerts/2022/december/sec-lbry-examining-the-implications-of-the-secs-latest-victory-for-crypto-and-digital-asset-markets https://www.ropesgray.com/en/newsroom/alerts/2022/december/s... LBRY's arguments sound like yours: LBRY argued in support of its motion for summary judgment that LBC coins are not securities because (1) they are consumptive in nature, with purchasers using LBC for on-chain activities rather than investment purposes; (2) the “primary focus” of LBRY’s promotional statements and materials was the utility of LBC, not its potential price appreciation; and (3) LBRY stated explicitly in marketing materials that LBC was intended for consumption on the LBRY network, not as an investment. The court also rejected LBRY’s argument that the purchase of LBC for consumptive, and not speculative, use by some of its buyers suggests that LBC is not a security for any of its buyers. The court suggested that the intended use of the token by a subset of LBC purchasers was of limited relevance to the overall analysis, which ultimately indicated that LBC was a security under the Securities Act.10 https://www.cooley.com/news/insight/2022/2022-12-01-another-win-for-the-sec-securities-and-exchange-commission-v-lbry https://www.cooley.com/news/insight/2022/2022-12-01-another-...
    - joshuamorton 3y ago
      But this is where judges come in, who can analyze things like real world intent. And stuff like "At launch, LBRY retained 400 million LBC for its own use" doesn't to me imply that these things are the same. TCGs do not function like securities. If I am a securities issuer, I make money primarily when the security goes up in value. If I am a TCG producer, I make money when people buy more of the product, irrespective of the value of it. The goal of a securities issuer is to, over time, inflate the value of the security. The goal of the TCG issuer is to reduce the value of the cards (on the secondary market) by producing more of them. Konami stock goes the more blue-eyes white dragons are printed. That isn't true for LBRY, and that's what the "common enterprise" bit is about. Hasbro and Konami and the Pokemon company aren't keeping a stockpile of additional secret super valuable cards to go up in value over time, because they aren't securities and they don't act like securities, and the companies will just print more of them if they want to. But that isn't true for LBRY when they keep a hold of the asset they create and bet on its value increasing over time! And of course this is why we have judges. They can look at the evidence and see that The vast majority of LBRY investors were investing with a profit expectation, LBRY was treating the token as an investment that people could use to profit from the platform's success, etc. The difference is that with LBRY, people treating it as a security was the norm, but with TCGs, treating it as a security is done only by exceptional investors, and the companies don't condone it, even tacitly[0]. And the actual filings in the case make that abundantly clear. You don't have the CEO of Hasbro or Konami or The Pokemon Company releasing press releases about the market value of cards. Like in the past I'd seen some of these arguments and been somewhat convinced (especially around the whole secondary-market and tax issues), but this feels really cut and dry. [0]: (except perhaps with MTG's reserved list, but that still fails due to condition 2 above, Hasbro/Wizards and the "investors" in the Reserved list cards have different interests. They aren't invested in a common enterprise. Wizards would love, I mean absolutely adore reprinting reserved list cards, and they try all the time in sneaky ways (silver or gold border, near-functional reprints, digital versions, etc.) because reprinting those is good for the company. What it is bad for is investors in the cards. Those are distinct incentives, not a common enterprise, not a security.
- ameister14 3y ago
  So it's clearly not horizontal, right, and your argument is that there is a vertical common enterprise? I don't think it's all that poorly defined, but either way, for a vertical the 11th circuit required that you must "show that the investors are dependent upon the expertise or efforts of the investment promoter for their returns." That's just not the case here. The show could end completely and "investors" (I don't think they are investors, either, but I'll go with you on this) continue to see returns. You've also got issues of control over the cards and the fact that people purchase them without intending to profit from them, both of which strike against you.
  - EGreg 3y ago
    Just because a show could hypothetically end and the assets would go up, may not be a convincing argument. Hypotheticals could go either way. One company owns the IP, the rights to the characters, to produce shows, they have the expertise, and it is exactly the show and the brand that drives the demand for merchandise sales. This is well established. They advertise the merchandise. Now, without the advertisement, there could remain a niche group of people who would pay a lot for collectibles, but nowhere near the amount of people or capital under their management than during the heyday of the show actually airing and constantly making the memes (pokemon, yu gi oh, whatever) relevant and driving demand. By your argument, LBRY the company could fold and people would continue to use LBRY tokens. Which is exactly what happened. So does that mean it wasn’t securities sales after all? As for the other issues you mentioned, the court explicitly stated that just because some people buy the cards for consumptive use doesn’t mean they all do. You could buy 100 tickets to a ball game, but intend to only take your family, and scalp the rest. One of the criteria for a securities sale is did you buy more than you could ever conceivably use? And if you keep the cards in mint condition unopened that’s pretty much textbook definition of investing into collectables. Then the only question us how much are you relying on the expertise of the company producing Yu Gi Oh content to… continue to produce Yu Gi Oh and keep it relevant. Now, if Yu Gi Oh was in the public domain and lots of entities could keep the memes going, sure. It would be super decentralized (although a strict reading by the SEC could nevertheless see a “common enterprise” horizontally across all of them, much as they are considering now for Ethereum!) But since all these initiatives (Teenage Mutant Ninja Turtles, the music and movie industries etc.) work off massively relying on copyright protections, so they are the ONLY ones authorized to use / license the characters, then yeah you’re kind of relying on the efforts of a third party promoter to make sure a lot of people give a crap about your mint condition charazard collectibles! Do the following thought experiment … if some group were selling the same exact type of trading cards in the form of NFTs, and creating Telegram channels to promote them, creating all kinds of episodes featuring those characters, are they a “common enterprise”?

EGreg 3y ago

If not for the show, the cards wouldn’t be worth as much. The show is what is spreading the memes and driving the demand for show related merchandise. That IS the business model! It sounds like your whole defense would hinge on hoping the SEC won’t be able to convince a court that it’s a common enterprise. I looked it up and “common enterprise” is not very well defined in either statutory law nor case law. I have been over this with many people and made them realize that you can’t possibly predict “this isn’t a common enterprise” defense would work in a court or law. SEC has argued many novel concepts, just this year with LBRY for instance. And they were successful. If they want to say it was a common enterprise, and the term is not even well defined, then they will make a strong case. It’s not up to you reading your own opinions into definitions, it’s whether a judge or jury makes a decision in a case, and / or whether the SEC exercises their restraint.

joshuamorton 3y ago
> The show is what is spreading the memes and driving the demand for show related merchandise. That IS the business model! I'm actually not sure how true this is. Given that there are non-pokemon examples (like magic: the gathering) that don't have cross-branding, and there exists a competitive pokemon TCG scene independent of the show, and the cards maintain a secondary market value as long as people want to play kitchen-table or collect them as collectibles, which will be true independent of the success of the Pokemon company, the common enterprise thing falls apart. I don't purchase pokemon cards as an investment in The Pokemon Company^tm with the expectation of profit. I purchase them as a toy to entertain me. That fails prong two and three. That a secondary market exists, and that particular objects have a high secondary-market value doesn't make the whole thing a common enterprise for profit, and I really doubt the majority of pokemon card purchasers do so with the intent to profit, same with MTG. Most people want some cool cards and entertainment, and throw them away. (And this is backed up by data: with MTG, which has astronomically higher demand and card prices than pokemon, their market research shows that, by far, their largest consumer segment is entirely casual players who never attend sanctioned events. They buy packs or precons. So concepts like the secondary market value are immaterial for the majority of the consumers)
- EGreg 3y ago
  Sorry but it's not about what you do. Even if it fails prong 2 and 3 for you, the SEC can still successfully argue that the vast majority of sales are securities. This was the dangerous precedent set in their victory over LBRY in December 2022. They argued that if at least some people bought the utility tokens with expectation of profit, then the utility token sales were securities -- and the judge bought it! https://www.ropesgray.com/en/newsroom/alerts/2022/december/sec-lbry-examining-the-implications-of-the-secs-latest-victory-for-crypto-and-digital-asset-markets https://www.ropesgray.com/en/newsroom/alerts/2022/december/s... LBRY's arguments sound like yours: LBRY argued in support of its motion for summary judgment that LBC coins are not securities because (1) they are consumptive in nature, with purchasers using LBC for on-chain activities rather than investment purposes; (2) the “primary focus” of LBRY’s promotional statements and materials was the utility of LBC, not its potential price appreciation; and (3) LBRY stated explicitly in marketing materials that LBC was intended for consumption on the LBRY network, not as an investment. The court also rejected LBRY’s argument that the purchase of LBC for consumptive, and not speculative, use by some of its buyers suggests that LBC is not a security for any of its buyers. The court suggested that the intended use of the token by a subset of LBC purchasers was of limited relevance to the overall analysis, which ultimately indicated that LBC was a security under the Securities Act.10 https://www.cooley.com/news/insight/2022/2022-12-01-another-win-for-the-sec-securities-and-exchange-commission-v-lbry https://www.cooley.com/news/insight/2022/2022-12-01-another-...
  - joshuamorton 3y ago
    But this is where judges come in, who can analyze things like real world intent. And stuff like "At launch, LBRY retained 400 million LBC for its own use" doesn't to me imply that these things are the same. TCGs do not function like securities. If I am a securities issuer, I make money primarily when the security goes up in value. If I am a TCG producer, I make money when people buy more of the product, irrespective of the value of it. The goal of a securities issuer is to, over time, inflate the value of the security. The goal of the TCG issuer is to reduce the value of the cards (on the secondary market) by producing more of them. Konami stock goes the more blue-eyes white dragons are printed. That isn't true for LBRY, and that's what the "common enterprise" bit is about. Hasbro and Konami and the Pokemon company aren't keeping a stockpile of additional secret super valuable cards to go up in value over time, because they aren't securities and they don't act like securities, and the companies will just print more of them if they want to. But that isn't true for LBRY when they keep a hold of the asset they create and bet on its value increasing over time! And of course this is why we have judges. They can look at the evidence and see that The vast majority of LBRY investors were investing with a profit expectation, LBRY was treating the token as an investment that people could use to profit from the platform's success, etc. The difference is that with LBRY, people treating it as a security was the norm, but with TCGs, treating it as a security is done only by exceptional investors, and the companies don't condone it, even tacitly[0]. And the actual filings in the case make that abundantly clear. You don't have the CEO of Hasbro or Konami or The Pokemon Company releasing press releases about the market value of cards. Like in the past I'd seen some of these arguments and been somewhat convinced (especially around the whole secondary-market and tax issues), but this feels really cut and dry. [0]: (except perhaps with MTG's reserved list, but that still fails due to condition 2 above, Hasbro/Wizards and the "investors" in the Reserved list cards have different interests. They aren't invested in a common enterprise. Wizards would love, I mean absolutely adore reprinting reserved list cards, and they try all the time in sneaky ways (silver or gold border, near-functional reprints, digital versions, etc.) because reprinting those is good for the company. What it is bad for is investors in the cards. Those are distinct incentives, not a common enterprise, not a security.
ameister14 3y ago
So it's clearly not horizontal, right, and your argument is that there is a vertical common enterprise? I don't think it's all that poorly defined, but either way, for a vertical the 11th circuit required that you must "show that the investors are dependent upon the expertise or efforts of the investment promoter for their returns." That's just not the case here. The show could end completely and "investors" (I don't think they are investors, either, but I'll go with you on this) continue to see returns. You've also got issues of control over the cards and the fact that people purchase them without intending to profit from them, both of which strike against you.
- EGreg 3y ago
  Just because a show could hypothetically end and the assets would go up, may not be a convincing argument. Hypotheticals could go either way. One company owns the IP, the rights to the characters, to produce shows, they have the expertise, and it is exactly the show and the brand that drives the demand for merchandise sales. This is well established. They advertise the merchandise. Now, without the advertisement, there could remain a niche group of people who would pay a lot for collectibles, but nowhere near the amount of people or capital under their management than during the heyday of the show actually airing and constantly making the memes (pokemon, yu gi oh, whatever) relevant and driving demand. By your argument, LBRY the company could fold and people would continue to use LBRY tokens. Which is exactly what happened. So does that mean it wasn’t securities sales after all? As for the other issues you mentioned, the court explicitly stated that just because some people buy the cards for consumptive use doesn’t mean they all do. You could buy 100 tickets to a ball game, but intend to only take your family, and scalp the rest. One of the criteria for a securities sale is did you buy more than you could ever conceivably use? And if you keep the cards in mint condition unopened that’s pretty much textbook definition of investing into collectables. Then the only question us how much are you relying on the expertise of the company producing Yu Gi Oh content to… continue to produce Yu Gi Oh and keep it relevant. Now, if Yu Gi Oh was in the public domain and lots of entities could keep the memes going, sure. It would be super decentralized (although a strict reading by the SEC could nevertheless see a “common enterprise” horizontally across all of them, much as they are considering now for Ethereum!) But since all these initiatives (Teenage Mutant Ninja Turtles, the music and movie industries etc.) work off massively relying on copyright protections, so they are the ONLY ones authorized to use / license the characters, then yeah you’re kind of relying on the efforts of a third party promoter to make sure a lot of people give a crap about your mint condition charazard collectibles! Do the following thought experiment … if some group were selling the same exact type of trading cards in the form of NFTs, and creating Telegram channels to promote them, creating all kinds of episodes featuring those characters, are they a “common enterprise”?