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Kik and the SEC: What’s Going on and What Does It Mean for Crypto? (a16z.com)
82 points by karanbhangui 8 days ago | hide | past | web | favorite | 24 comments





I really dislike the ongoing usage of the word "crypto" to mean "cryptocurrency", i.e. "cryptographical currency". I can never tell if something's happening to ICOs or cryptography.

This is especially difficult when Kik is involved, since it uses cryptography and is involved in cryptocurrency. I was interested until I saw it was about ICOs.

What does Kik use cryptography for?

Also ICO and cryptocurrency are not the same thing.

As someone with a keen interest in cryptozoology, I agree.

And a sufferer of cryptorchidism.

> 50% of participants in the token sale purchased less than $1000 of Kin, which seems more consistent with a consumptive use vs. investment purpose argument.

So 50% purchased more than $1000. To do what, buy stickers and themes?

I'd wager than even the "under $1000" crowd will be 90% cryptocurrency investors holding it as part of a "balanced" portfolio.


That line makes the post seem tonedeaf. Maybe "less than $1000" is the definition of throwaway consumption money for someone who works at Andreessen Horowitz, but for many of the hopeful retail investors in 2017 ICOs, it may have been a large chunk of their savings.

The proposed Token Taxonomy Act is relevant. https://www.congress.gov/bill/116th-congress/house-bill/2144...

I think its really necessary to differentiate between ICOs and cryptocurrency in general.


The distinction between securities and "digital tokens" as the proposed bill refers to them appears to be this:

> [a digital token] is not a representation of a financial interest in a company or partnership, including an ownership interest or revenue share


IANAL, but:

The interesting thing about securities is that although we think of a security as a "thing" (like Kin) its actually a transaction - as in a "securities transaction". Meaning with two transactions involving Kin, one transaction could be a securities transaction, and the other could not.

This is more obvious when you think of the original Howey test. Selling an orange grove is not a securities transaction, but selling an orange grove where you also promise to cultivate the asset for the profit of the investor is.

Selling $5 of Kin in to a Kik user doesn't sound like a securities transaction, but selling $5 Million to a VC fund does (though probably one exempt from registration).


Sort of - but it's more about intent/expectation than "thing" vs "transaction." A security _is_ a thing. The Howey test is how we determine whether an orange grove is a security or a deed. The problem with Howey is that it doesn't address situations where investors aren't investing exclusively for "profit" but might be investing for some other benefit to be derived from the use or enjoyment of the underlying asset. So someone might purchase $500 of Kin with the expectation that they'll sell if it reaches $X and regardless they'll spend at least some of it on mini games.

They expect to consume at least some of the coins... but they also anticipate potential profit from some of the coins.

So are the coins "securities?" Are only some of them? (Presumably, $500 - whatever the buyer intended to consume.)

You can see that Howey's focus on investor expectation isn't particularly helpful in where that line is drawn.


In United Housing v Foreman, a sale of stock was considered not to be a securities transaction, even though a stock is explicitly a security.

The court determined the "stock" was not a security. Calling something "stock" creates a rebuttable presumption that it's a security but the purchasers of the co-op "stock" didn't have any possible expectation of profit (the "stock" couldn't appreciate in value, would not pay dividends, was non-transferable, etc.) so it failed the Howey test. Merely calling something stock does not make it so.

You might find SEC v Lauer[1] interesting. Where a non-existent hypothetical investment was determined to be a security. As well as SEC v Edwards[2], where a fixed-rate leaseback agreement for payphones was determined to be a security.

[1] https://caselaw.findlaw.com/us-7th-circuit/1054989.html

[2] https://caselaw.findlaw.com/us-11th-circuit/1156201.html


Ah. Yes I think Foreman was a bad example of what I was trying to get at.

My main point was that if Howey had 100 fungible orange groves, and one was sold as a security and 99 were sold straight up, that wouldn't make all 100 orange groves as a security, would it?


how does the law work when you did something before it was illegal? or why it's not the case here?

The SEC isn't a lawmaking body; its job is to decide whether somebody is breaking the law as it stands. So there is no question of "before it was illegal" or ex post facto law here: the question is whether cryptocurrencies (or some subset of them that meet specific criteria) are breaking existing law. If the SEC takes this case (or any of several similar ones) to court and wins, that doesn't mean the cryptocurrencies involved have suddenly become illegal: it means they were illegal all along, it just took law enforcement a while to catch them.

Depends on the country. The phrase you're looking for is "ex post facto". Doesn't fly in the US.

That said, if I'm reading this article correctly, all that happened was that the SEC issued guidance on the legality (that is, not legal) of various forms of ICO. That doesn't mean ICOs were legal before, just that the SEC hadn't issued guidance about it.

If your argument in court is "well nobody told me specifically that my exact actions were illegal, because your honor, I stabbed that guy while hopping on one foot on a Tuesday while it was raining", then the court tends to take a dim view of it. I don't know the case, but if Kik's argument was "well we sold a security before anyone told us specifically that this thing is actually a security", it might pan out in a similar fashion.


Generally, you can say that if you don't know what you're doing is in fact legal, you should get some legal advice. Of course, this isn't practical in every situation. Sometimes you just have to take a chance if the stakes are low. However if what you're doing looks an awful lot like selling securities, but you don't actually know if it counts or not, I hope you'd get some advice on that matter. I'm curious if they did.

In general, if you did it before it was illegal, then you're fine! But note that is almost certainly 100% irrelevant here, because the SEC is arguing (very plausibly) that at least some forms of ICOs were always clearly illegal, or at any rate have been clearly illegal since at least 1946.

The argument that you launched your ICO before <insert event>, so you should get a pass is unlikely to fly with anyone. Either it violates the laws or it didn't, and since the relevant laws haven't changed in decades, if it violated them, you're in trouble.

(Also note that the financial industry is rife with people promoting scams and arguing they don't quite violate the law because of some technicality. This never works.)


The Securities Act of 1933, the Securities Exchange Act of 1934, and the 1946 Howey test predate cryptocurrencies.


The SEC is a regulatory agency, not a lawmaking body. It can decide that something novel like an ICO breaks existing rules.

legal precedence was poorly thought out



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