Thread by @msantoriESQ

1/ 🚨🚨🚨 SEC Publishes its long-awaited guidance on ICOs, the Howey Test, and everything else. A "baby steps" no-action letter released as well. Thread below for analysis 👇

2/ OK first before we get into it - the no action letter is for a company that sells tokens redeemable for travel on private jets. Private. Jets.

3/ The SEC says the "Turnkey Jet" token is not a security so long the token is:

a) fully functional at the time of sale
b) not transferable outside the platform

4/ Also, the issuer must not:

c) use the token proceeds to develop the platform
d) offer to rebuy the token for a profit
e) market the token to emphasize anything but the token's functionality
f)...which must be to redeem the issuer's services

5/You might read this and think it's crazy restrictive. My first reaction is that (b) is the only really problematic one, and that this no-action letter is a baby step toward developing more robust jurisprudence. Now let's look at the framework behind this decision...

6/ Oh bummer. It just says "Here is a list of all of the things token sellers do. If you do the things on this list the token might be a security" Not as helpful as we'd hoped. Sorry for the sirens. You can read it here: sec.gov/files/dlt-fram…

7/ OK there is a useful fact pattern at the end but it is so heavily caveated that it essentially ignores how tokens actually work and the reasons why people use them. Here goes:

8/ It is a variation of the "Nike Coin" example I've proposed in my talks, which is good for the ego, but it takes a nasty turn at the end. Imagine Nike creates a coin that is redeemable for 1 pair of Dunks (do people still wear Dunks?)

9/ The dunks are already manufactured and are already on the market, so Nike sells the coins for the exact price of a pair of Dunks, and rewards frequent purchasers with fractions of a coin - typical rewards program. That's great right?

10/ Sadly, the coins cannot be transferable, lest they be deemed a security. So, I must ask: Why would anyone use a token?

11/ The SEC promised guidance that would aid entrepreneurs in determining what tokens are securities, then published guidance saying "If it makes sense to use a token, it's probably a security"

12/ I'm delighted that there is so much of the SAFT Framework DNA in the SEC's framework - It seems deeply focused on the line of functionality. Perversely, now the SAFT framework may be the *only* way to get pre-functional tokens on the market without raising the SEC's ire.

12/ The transferability prohibition seems as deeply-engrained in this analysis as the functionality requirement is. Transferability, specifically interoperability, is a touchstone of these networks - and the ERC-20 standard in particular.

13/ Because the no-action letter and the framework each contain "no-transferability" caveats, I don't immediately see how this advances the discussion or gives clarity to any entrepreneur who really needed it. Bummer.

14/ I mean, we know why this prohibition is included: If there's no transferability, then there can't be any expectation of profit. Can't sell them on exchanges so Howey Test can't be satisfied. EZPZ.

15/ But that position excludes too much. SEC says that the "expectation of profit" prong is satisfied if there is a secondary market and the purchaser expects to make a profit. This is demonstrably false.

16/ The purchaser can still expect a profit, but the profit motive must *outweigh* the consumptive motive. That's the whole point of SEC v Forman, the seminal case on the issue.

17/ This basic distinction underlies almost all of the sophisticated thinking on these issues, including the @TheBKP_Official papers.

@TheBKP_Official 18/ I can only hope that we'll see more analysis on the transferability issue in subsequent guidance.

Whoops forked my own thread. Continue here...

https://twitter.com/msantoriESQ/status/1113478380391890944