1/ Today, in a speech at the Yahoo Finance Summit, SEC gave landmark guidance on token sales. It finally answered the question “When is a token sale a security?” It’s a Really Big Deal™ and I’m going to break it down here. SPOILER: It's really good and totally reasonable.
2/ Important: This is not law. It’s the Head of SEC’s division of Corporation Finance’s “personal interpretation” of the law. But he’s basically the guy in SEC who decides its official interpretation, so you know what that really means. OK, now to the good stuff…
3/ The Ether token, according to SEC, is not a security. The Ethereum Foundation’s sale of Ether, on the other hand, almost certainly was a security (SEC didn’t say that last part explicitly but pretty much laid it out).
4/ “But Marco! How can something at the same time be both a security and not be a security?!” That’s because SEC, and many lawyers in private practice (me included) distinguish between the token itself and the sale of the token.
5/ As it’s now commonly understood: The contract between Howey and the investors was a security, but the oranges were not a security. The oranges had a consumptive, functional use (a yummy one).
6/ Lee Schneider, BTW, was the first lawyer I heard take this position publicly. I don’t think he’s on twitter so he's clearly garbage but respect where due…
7/ The contract for the sale of Ether between the Ethereum Foundation and each purchaser, under SEC’s reasoning, passed the Howie test. Similarly, Ether, when first delivered, almost certainly passed the Howie test too. Ether today, though, doesn’t.
8/ How? Why? Wha? SEC says the token is now sufficiently “decentralized”, so it’s not a security. That’s an interesting standard. Let’s see what SEC means by that…
9/ SEC says a token is sufficiently decentralized “where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts” Hrm. This sounds familiar…
10/ SEC goes on to say decentralization is “when the efforts of the third party are no longer a key factor for determining the enterprise’s success.” Wow this really does sound familiar...
11/ We discussed this phenomenon at length in the SAFT Project whitepaper. In the whitepaper, we called this line “functionality”. SEC calls it “decentralization”. Is it the same thing? Almost, but not quite.
12/ For one, SEC included a footnote about SAFTs, saying that each token is a unique and beautiful snowflake so there's no way to say a SAFT was legal or illegal. Every transaction is different (Correctamundo!)
13/ Hinman did note, however, in the same breath, that a token can evolve from a security at the time of offering to a nonsecurity. It depends on the economic realities of the transaction (technically a misstatement of the SAFT Framework but good news!)
14/ At the end of the statement, Hinman stresses “full functionality” of the token, but he adds a bunch of other really important factors too. I’ll list some of them here:
15/ First: SEC said "Marco, it's spelled Howey, not Howie. You've only been out of private practice like six minutes how are you already embarrassing yourself on Twitter? You're garbage."
16/ Ahem. Anyway, You Might Be Selling A Security If: someone is artificially setting the price, influencing the secondary market, or influencing trading *cough*BUYBACKS*cough*
17/ ...if you're selling them in mass quantities that far outstrip potential use, that weighs in favor of security status
18/ ...if there are baked-in incentives for use, and discourage holding for price appreciation, that weighs against security status.
19/ if you targeted the advertising to those who would be most likely to use the token, instead of the general public *cough*BANNERADS*cough*, that weighs against security status
20/ You can read the release for more. Those were some important ones. There's one more, though, that I'm going to quote in totality:
21/ "Is there a person or group that sponsored or promoted the creation and sale of the digital asset, the efforts of whom play a significant role in the development and maintenance of the asset and its potential increase in value?" This is the very heart of the SAFT framework
22/ Not all SAFTs are going to be compliant, and a token sale isn't compliant simply in virtue of using a SAFT. Quite the opposite: The facts, circumstances and economic realities will be unique in every transaction.
23/ It looks like most pre-functional tokens are securities in the eyes of SEC, but mere functionality isn't enough either. It's just one indicator of non-security status.
24/ Anyway I've blown way past my 21-tweet limit. Sorry Satoshi. Long story short: This is a pretty reasonable position from SEC.
25/ Today's clarification could pave the way for a robust token economy, and a great variety of compliant tokens. It will limit some activity in the US, and it probably keeps accredited investors' seat at the head of the table. Still, on balance, very positive news.
26/ some further thoughts here:
