“At this stage, without full discovery and disputed issues of material facts, the Court cannot make a determination whether the BLV token offered to the 32 test investors was a ‘security,’”
>According to the court, in the ICO context there must be a ‘risk of financial loss’. This supports the proposition that something like an airdrop, by itself, cannot be a securities offering...
So tokens even if securities may not violate securities laws by being distributed via airdrop.
I think ultimately the tokens here will be securities here, unless the transfer of the tokens are restricted (and they include no right to company profits).
Transfer probably doesn't have to be restricted. From what I've heard, the promoters of the security aren't allowed to solicit exchanges to list their token, but aren't under any obligation to stop others from selling it.
I mean clearly it could contribute to an expectation of profit, but how do the other prongs of the test get violated?
Last year I did invent a novel mechanism to allow tokens to comply with securities laws while both allowing end users to spend them as utility tokens and accredited investors to profit from them as investments, so I'm curious to see if a real market need develops here.
Not saying you didn’t. But keep in mind one of the biggest and most prominent law firms in the tech/startup/Blockchain space published the original “legal framework” for SAFTs (simple agreement for tokens) based on SAFEs(simple agreements for equity) which was premised on a utility token...18 months later the SEC dropped the hammer on companies who ICO’ed using said SAFT framework.
So question did you submit your legal framework to the SEC and they told you it is compliant?
I haven't, but it's done in a way that makes it impossible for any of the prongs of the Howey Test to be met for non-accredited investors. (There is no investment, there is no possibility of profit, etc.) So if there are things that need to be changed, which there may be, they're probably relatively minor.
> 18 months later the SEC dropped the hammer on companies who ICO’ed using said SAFT framework.
What the SEC has repeatedly affirmed is that the law hasn't changed since the 1920s or whatever. The fact that the law firm in question may have been advising their clients to commit crimes doesn't mean the law has changed.
The SEC created an entire division and online submission portal to handle these requests, and to date no one has established a legal framework for ICOs (short of registering the token as a security, or accredited investor only exemptions). Congress has even asked the SEC to publish guidelines for a legal ICO, and to date the SEC hasn’t (likely because short of registering/accredited investor exemptions/transfer restriction the SEC can’t come up with a legal framework).
I mean it's not something I'm actually working on so it would be a waste of time and money to solicit the SEC's guidance. I've told some other people who are planning ICOs how the system works, so if they want to actually implement it then it's their responsibility to pay to have their lawyers sit in on SEC meetings and for a legal opinion, documents, etc.
It’s free (no SEC fees) and you don’t need a lawyer. I’d recommend a lawyer...but there are no SEC meetings for them to sit in on and bill you for.
If ICO abuse is not curbed, it will become the weapon of choice for all kinds of scammers and hucksters. I'm obviously not anti-crypto, but the scene __has__ become a Wild West. Tying law enforcement's hands will embolden the bad actors and make it less likely for the good actors to attain mainstream acceptance.
For instance, there was EtherDoge. They were pushing their air drop on Reddit. However, they coded in to the smart contract pushing back the air drop. Their website showed a "team" with photos stolen off of Twitter and LinkedIn. Whenever you called them out on Reddit, the mods of the subreddit were deleting the posts.
Obviously not every ICO is conducted thusly, but straight up fraud still needs to be addressed.
It does offer legal protection to people who only did an airdrop and not an ICO, but realistically the SEC wasn't going to go after any of these people anyway unless they solicited exchanges to list their token.
Under securities law, ALMOST ANY kind of deal to trade money for an intangible where the buyer expects to profit from others’ work is a security. Exchange listings having nothing to do with it.
Nothing is new under the sun and since the Securities Act of 1933 innumerable schemes to sell paper to rubes have been tried using different names, labels, or tweaks to avoid the regs. Universally the shenanigans get slapped.
Pretty much, the thing that ICO promoters want to do (get money or pseudo-money from people looking to profit) is tautologically securities sales under our current US regulatory regime.
Source: business partner and I burned a lot of lawyers’ time in late 2012 seeing what was going to come of the equity crowdfunding/JOBS Act stuff for a startup, and ultimately decided to wave off (you’ll note that essentially nothing new has come from that; most all the issuers in that space still rely upon traditional SEC exemptions etc.)