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1/ According to the Director of Corp Fin, Bill Hinman, a security can morph into a non-security and morph back into a security. Not a new concept coming from him. But how does this work? 👇
2/ Remember two key prongs of Howey: (i) expectation of profit that is (ii) predominantly based on the efforts of others. Now let's think through how investment contracts can morph nonstop.
3a/ Issuer sells to Party A a token and Party A thinks it'll make a bunch of money from Issuer's efforts (security).
3b/ Party A uses the token to buy a pizza from Party B who just wants to get the cash value of the token for what the pizza is worth (non-security).
3c/ Party B goes to an exchange to sell the token to Party C who wants to hodl it forever to make money based on Issuer's efforts (security).
3d/ Party C hodls for a while and Issuer's efforts and the underlying blockchain network have become sufficiently decentralized so Party C plans on making money but no longer from Issuer's efforts (non-security).
3e/ Issuer does not like how the network has been developing so it forks the network and re-launches efforts to create adoption and use of the network. Party C now holds the token and forked token with the token being a non-security and the forked token being a security.
3f(i)/ A little while later the forked network and Issuer's efforts have become sufficiently decentralized so Party C now holds the token and forked token, both of which are non-securities.
3f(ii)/ The forked token becomes so widely adopted that everyone is using it just like it uses cash today and society's use of cash is minimal relative to the token. The forked token is now a currency and, therefore, no longer a security.
4/ The SEC would like a no-action letter to be submitted when determining whether a token has morphed from a security to a non-security. I hope the SEC's budget will be increased significantly
5/ This is going to be so much fun!
