1/ Put on your parachute pants because today we're diving into AIRDROPS. Are they illegal? Can they be an alternative to an ICO? Did the SEC say yesterday that they’re forbidden? Is this all FUD??? Read on because this is gonna be a weird one.
2/ Yesterday, the SEC announced an enforcement action against the backers of Tomahawkcoin. The coins were allegedly sold to the public as equity in a company that would drill for oil and distribute the profits to token holders.
3/ Tomahawk asked for money in exchange for the tokens but abandoned the ICO after the ICO …pretty much failed. They didn't end up taking in any money.
4/ The company turned instead to a “bounty program”: Tomahawk gave tokens to anyone who agreed, in exchange, to market the coin. SEC said this bounty program was an "offering" of a "security" even though nobody paid money.
5/
6/ This sounds weird, so let's unpack it: An offer to transact in a security can still be a "securities offering" even if the seller isn't getting money in return, because the seller still gets value in exchange, like marketing and good will.
7/ But: This is only true if the asset being offered is independently a security! Giving something away that is not a security doesn't make it one. This is a critical distinction lost on many observers who claim, erroneously, that Airdrops are off-limits for utility tokens.
8/ If you’ve been following my very serious and important twitter law practice, you know that there are lots of different kinds of securities: stocks, undivided interests in oil or gas, investment contracts, etc. Issuers can, of course, represent these securities as tokens.
9/ If you were to give away those tokens in, say, an airdrop, that's probably a securities offering. After all, you wouldn't be doing the airdrop if you weren't getting something out of it, right?
10/ BUT: For the airdrop to be a securities offering, the token you're airdropping must be a security independent of the airdrop. Airdropping the token can't by itself make the token a security. Sounds obvious, but stick with me it's gonna get weird like I promised...
11/ This line of inquiry is important for "utility tokens" "appcoins" "consumer tokens" or whatever we're calling them this week. These kinds of tokens are usually securities *only* because they pass the Howey test for an investment contract.
12/ The Howey test requires, among other things, "an investment of money". If there is no investment of money, the utility token can't be an investment contract. Black-letter law across the US.
13/ Giveaways like airdrops are the antithesis of an investment of money. Utility tokens distributed via airdrops cannot, strictly speaking, be investment contracts.
14/ This is ultimately a facts-and-circumstances test so :deep breath: there are plenty of externalities. I.e., utility tokens airdropped AND sold to the public obviously could be. Airdropped tokenized securities could be, too. After all ...they're already securities.
15/ There is actual, honest-to-goodness precedent on this issue: Nearly every court that has looked at the question has found that you can't have an investment contract unless the purchaser risks *financial loss*.
16/ (ok one court said almost maybe "services" could possibly in some universe be enough, but didn't bother to say how, and then ruled in the other direction anyway)
17/ So, the upshot: Distributing utility tokens via an airdrop can actually be a pretty effective way to ensure you're not offering securities under US law in lots of circumstances.
18/ "But msantoriESQ, if that's true, then why did Tomahawk get in trouble," you might ask. "None of the bounty recipients ever put any capital at risk!"
19/ Well, SEC never says that there was an "investment of money" via the bounty program. They never said the bounty program made the token a security.
20/ Instead, they said Tomahawkcoin was *already* a security for two reasons: 1) The ICO demanded an investment of money, making it an investment contract; 2) The token was basically an equity security, which is… obviously a security itself.
21/ So Airdrops really can be a workable substitute for ICOs. Even better: they can put tokens into lots of hands, driving "decentralization", which SEC said is the way a pre-functional utility token can move from security to non-security. Pretty cool stuff. Fin.
