1/ Although I have views on much of Gensler’s speech today (sec.gov/news/speech/ge…), one aspect of it is highly problematic. A 🧵
2/ He says: “if you’re asking a lawyer … if something is over the line, maybe it’s time to step back from the line. Remember that going right up to the edge of a rule or searching for some ambiguity in the text or a footnote may not be consistent with the law or its purpose.”
3/ I’m tempted to mock that statement but being serious for a moment, it’s a real problem. Economic realities are important but so are legal realities. The legal reality is that each Howey and Reves analysis requires questioning whether something is over the line.
4/ Howey requires a review of 80 years of case law with little development on certain prongs or their applications in certain circumstances. For example, the efforts of others prong has not been tested very much in certain ways and official SEC guidance doesn’t help much.
5/ Case law is scant on whether (a) the expectation of profit exists and independently the efforts of others exists or (b) the expectation of profit needs to be from the efforts of others. This isn’t pushing boundaries. It is getting to the right answer.
6/ To be more precise: if person A expects profits from holding bitcoin and efforts of others (person B) will cause bitcoin to increase the value, should the last prong of a Howey be met? I think not but case law is not 100% clear. So do we just step back from the line? NO
7/ Now, if person A expects profits from holding token X and the profits are expected because of efforts of others (person B), should the last prong of Howey be met? I think yes.
8/ This example is only one within the Howey test. I could point to quite a few others on every prong of Howey. Now let’s move on to Reves.
9/ Reves isn’t as old as Howey but there is still 30 years of case law to review. Reves also is a balancing test, requiring you to weigh 4 elements to determine whether the test is met. Sometimes one element existing may be enough to not have a security note; other times it’s not
10/ Example: the fourth element of Reves asks whether a separate regulatory regime, insurance or collateral exists. Courts put more weight on alternative regulatory regimes and collateral than on insurance because they prevent harm in the first place.
11/ Courts don’t recognize all regulatory regimes as equal. Banking regs are sufficient but money transmitter laws are not. Well, what about the CEA, is that enough? We don’t know. So should we just step back from the line? NO
12/ Or for collateral, a depreciating asset like car liens as collateral has weighed heavily in favor of not having a security note, so what about collateral being an asset like bitcoin. We don’t know. So, do we just step back from the line? NO
13/ One interesting question is how do we usually resolve situations where we are close to the line. We seek no-action relief from the SEC. It is well known that the SEC isn’t willing to explore it. This means we are left walking the line.
14/ So, anyway, the point of this thread is to say that we absolutely should not step back from the line. We should figure out where the lines are by requiring courts to tell us, especially when regulators will not. It’s why there are three branches of the government after all 😀
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