Unicorns are rarely seen:
u·ni·corn ˈyo͞onəˌkôrn noun
A Unicorn is a mythical creature, something amazing which is hard to catch or simply a very rare find.
Click to purchase the above item
A pure non-securitized distributed ledger utility token is analogous to a unicorn. Credit this wit to Sara Hanks the co-founder and CEO of CrowdCheck.com.
Bona fide proof-of-work distributed tokens aren’t likely to be securities. So they’re excluded from this analysis of the intersection of crowdequity and token issuance.
“I believe every ICO I've seen is a security,” the SEC Chairman Clayton has verbally reiterated numerous times over the past several months and again in December an official written warning. The panel of expert securities attorneys agree and 99% of the securities attorneys agree that the existence of a non-security, distributed ledger “utility token” is a yet unseen unicorn. And it’s unlikely such a unicorn could ever be devised†…
Apparently it’s a popular misconception to presume that major law firms have been providing legally binding opinions blessing and indemnifying the sale of unregistered ICOs based on the premise of issuing non-securitized utility tokens. Au contraire, these lawyers are merely providing non-binding legal analysis advisories or memos. Such analyses are laden with caveats which warn that the tokens might eventually be deemed securities. These legal analyses are derived from the following historical instances of non-securitized utility tokens or coupons:
- closed loop payment systems: e.g. Chuck E. Cheese's or arcades
- in-game currency: e.g. World of Warcraft gold
- loyalty programs: e.g. Groupon
However, the aforementioned historical examples didn’t trigger the profit expectation prong of the Howey securities test, because those example tokenized instruments couldn’t be redeemed nor traded at a potential profit in exchange for money, currency, or fungible equivalents.
I have assimilated the numerous assessments of the current situation by the pertinent expert attorneys. I’m lead to the following summary after cross-correlating all their logic, body language, and all relevant facts as I understand them. There seems to be underlying a nearly unanimous consensus about the securitization of all the so called distributed ledger “utility tokens” currently issued. The distributed ledger “utility tokens” all fail to exclude the profit expectation or other Howey test prongs. Mechanisms of form—such as stipulations or claims in white papers, web sites, or other disclosure documents—are irrelevant in the Howey test. (And such claims might even be fraud if they’re misrepresentations of material facts.) The Howey test’s three prongs always emphasizes the underlying substance of the economic reality instead of any obfuscating form or scheme. The Howey test classifies the circumstances which constitute an investment contract type of a security.
The said law firms are apparently providing legal memos because presumably they’re taking huge commissions and aren’t liable if they’re wrong. The law firms have safe harbor from lawsuits because the advisory memos (which could plausibly even be intentionally feigned legal arguments) are laden with sufficient (buried) legalese caveats.
Yet there could be “very expensive” repercussions1 including but not limited to potentially irreparable rescission for the issuers, promoters, brokers, exchanges, and (especially large) investors who intend to resell those tokens within 3 years.
Paradoxically, an essential motivation for not issuing tokens as a compliant security is so the tokens trade on unregulated global exchanges. This provides greater and often expedient liquidity. Thus exhibiting a prioritization on reselling and profit expectation. Thus making the tokens securities by definition. ERC-20 tokens are blatantly securities because they have no utility as a platform, other than the substance of enabling this expedient liquidity. Any “bright-line rule” such as consumptive use notwithstanding…
† However, I speculate that I may know how to create a non-securitized utility token, while partaking of securitized investment. That wouldn’t be an “ICO” though. This idea won’t be revealed today.
1 And there’s all sort of illegal trading potentially going on as well.
Any counter-examples?
My intention is self-deprecating and not pejorative—because someone similarly corrected me in 2015. I provide an example of how we deceive ourselves and fall into the Dunning-Kruger syndrome by presuming expertise we don’t possess. We (including myself, even in this blog!) may be especially prone to do this because we presume our well-founded expertise in technical fields will carry over to logical analyses of any STEM field issue.
I often read legally unsophisticated comments such as the one quoted below. These non-expert intuitions suffer from the level of unawareness I had (and may still have) about securities law until I studied the issue from 2015 until now:
EOS would count as a utility token since it represents a user’s fair allocation of network resources and is thus required to power apps and provide storage.
“Bright-line rules” such as the presence of consumptive use doesn’t absolve the expectation-of-profit prong of the Howey test. Besides, it seems reasonable observers might conclude that Blockone/EOS incriminated themselves. Dan (who apparently didn’t have Satoshi’s admiration) blatantly promoted EOS making statements that afaics seem to trigger the common enterprise and expectation-of-profit prongs of Howey. My subsequent section §Utility tokens are securities if issued bound to an investment contract which discusses the flaws of the SAFT’s attempt to separate the token issuance from the securities issuance, also seems to apply to the flaws in Blockone/EOS’s jurisprudence and metaphysics theory that the EOS blockchain will spontaneously implement and launch itself in a decentralized way not due to “essential” efforts of the common enterprise upon which the investors’ expection-of-profit depends on.
A former SEC enforcement attorney late last year stated that he:
was on the phone recently with three attorneys in the enforcement complex financial instruments group who appear to be ones gathering information on ICOs; and they were very interested in looking at networks of promoters and structures who have done multiple large ICOs.
EOS’ (BlockOne’s) board director and promoter Brock Pierce (the former childhood ~~actor~~) and its CTO/promoter Daniel Larimer have each been involved in more than one large ICO2. EOS is so far the largest public ICO ever and comparable in size to the private Telegram offering:
Brendan Blumer, CEO of Block.one, whose token sale for EOS is ongoing, with current estimates at $700 million, also said the company's token wasn't offered in the U.S. but did not respond directly about a subpoena.
The above quoted defense [with my emphasis added] seems to be an intentional misrepresentation of the facts because Blockone/EOS was effectively promoted and sold into the USA. I posit that it’s obvious to reasonable observers the situation has the hallmarks of being just an obfuscation of the economic reality to feign the presence of precautionary measures designed to enable denial of solicitation while employing measures which were a priori known to be subvertible and subverted by many if not most. Surely with it’s lucrative bounties the SEC can find innumerable witnesses who can attest to this fact. If the NBA commissioner can figure out how to fine $500,000 for winking, presumably the SEC can too if they want to. Howey is supposed to look at the substance of the economic reality and not the form. Yet when you’re money grabbing $1 – 2 billion in cryptocurrency in the first fundraising round (an amount entirely unnecessary for implementing the project) for the vampire squid, you probably don’t have friends in low places.
The Creature from Jekyll Island – Unprofessional Propaganda Book
Goldman Sachs Is A Small Fish; The Fed Is The Vampire Squid
Matt Taibbi in Rolling Stone:
The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
Euro is a Monetary Enslavement Paradigm
The European Stabilization Mechanism, Or How the Goldman Vampire Squid Just Captured Europe
Goldman Sachs’ recent purchase of the exchange Poloniex, alleged leak of confidential SEC intent to ignore all past violations for this specific case, and the purported plan to morph Poloniex into a regulated tokens exchange similar to Overstock’s plans for tZero, motivates me to ponder what might be Goldman Sachs’ role and influence3 in the future of distributed ledgers and their tokens. In that linked post (←click that link!) I mentioned highly speculative conjecture that posits the failure of SegWit (via donations theft by miners) and of Tether, potentially leading to an upcoming crypto winter due to bankrupting the non-regulated exchanges. If that outlandish hypothetical happens it might eliminate any remaining defiant resistance (to regulation) outside of U.S. jurisdiction. In §Possible Causes of Crypto Winter 2019 – 2024 of my prior blog, I wrote the following:
2. The regulators/banks have also been ramping up their probe/pressure on Tether (USDT). Estimates are some 15% of exchange volume and capital is tied up into USDT, and that the peg has been excessively printed out-of-thin-air. Pegs always fail, because the math of markets will not allow them to be viable (no matter how they’re constructed).
3. The SegWit theft and reversion to Satoshi’s Bitcoin protocol is still on the table as a possibility which I covered in my blogs The Real Bitcoin: which Bitcoin fork will win? and Shocking Crisis Coming to Cryptocurrency , as well as a Bitcointalk thread I started. If this happens, it could potentially bankrupt many exchanges.
2 Brock claimed he was involved in at least the first ICO: Mastercoin. And Dan issued the Protoshares ICO in 2013 that became Bitshares. There was Dan’s premeditated admission of the planned obfuscation of the Steem ICO as a sneaky insta/fastmine, which appears to flaunt regulations.
3 Whether the three above named individuals will be personally liable is afaics dependent on whether they committed premeditated fraud and misrepresentation of the material facts intentionally attempting to subvert the law. Blockone/EOS and Brock Pierce may be (c.f. also and also) connected to Goldman Sachs which apparently has its alumnus in the key positions at the U.S. Treasury and SEC. It’s not clear whether other countries will also crackdown on ICO-issued token such as EOS, and whether the posited connections to Goldman Sachs could provide any protection in those other nations.
Utility tokens are securities if issued bound to an investment contract
The SEC is going after SAFTs (c.f. also). I originally contemplated similar reasoning in September last year. A report issued by the Cardozo Law School in New York explains that SAFTs essentially subvert the substance of the definition of the investment contract security type, because the jurisprudence of a SAFT asserts that—a bright-line rule requiring presence of utility such as consumptive use, combined with irrelevant timing—supersedes or subsumes the economic reality of a securitized investment.
“The SEC is targeting SAFTs. The new approach of the SEC is to consider tokens as both utility and security at the same time, meaning a token can bring utility to a platform but at the same time can be considered as a security if you sold it to parties that mainly looked for profit on its increase in value.”
In summary, in the context of fundraising there will be no way to provide an investment return by issuing a tradeable token to the investor unless that token is a security (and thus not purely a non-securitized utility token).
There’s a thesis equating a SAFT to the economic reality of a gold mine, wherein the issued tokens are equated to mined gold. Yet the comparison (to issuance of tokens) belies the inability of any efforts or impacts of a mining enterprise to significantly affect the price of gold. Which by the way is the basis of the definitio