Thread by @boironattorney

1/ Based on messages I received asking for details around the lack of clarity, I figured elaborating on the thread from yesterday would be helpful.

https://twitter.com/boironattorney/status/1456324631355277315?s=20

Below I lay out areas where the Howey test is unclear and requires stepping close to the line. A 🧵

2/ Ambiguity #1: Does the issuer need to receive a benefit from the issuance for an investment of money or does the token recipient need to give up something of value? Courts have addressed it only tangentially and SEC commingles "investment of money" with a “sale.”

3/ Ambiguity #2: The SEC doesn’t believe common enterprise is a factor to consider. Courts disagree as they always look at whether there is a common enterprise. What a mess! Worth noting that courts use three different common enterprise tests, so each needs to be analyzed.

4/ Re expectations of profit, which focuses on a reasonable purchaser’s (token recipient’s) expectation of profit but an issuer’s actions may influence those expectations. A purchaser’s profit expectation rather than use needs to be the primary reason for buying the instrument.

5/ Ambiguity #3: How does the expectation of profit relate to the efforts of others as noted here

https://twitter.com/boironattorney/status/1456324638049374211?s=20

?

6/ Ambiguity #4: The test itself inherently begs the question of who is the reasonable token recipient? A sophisticated crypto participant? A random person on the street who knows nothing about crypto? How does crypto change things? Can an inherent profit expectation exist?

7/ Ambiguity #5: Cases are clear that an issuer creating a secondary market for an instrument increases the expectation of profit on that instrument. So, does the existence of DEXs ensuring a secondary market will exist change the analysis even if the issuer isn’t involved?

8/ Ambiguity #6: Does the fact that an asset intended to remain stable in price through a redemption mechanism could fluctuate in value on the open market lead to an expectation of profit on that asset?

9/ Ambiguity #7: To what extent can an issuer’s statements dictate whether an expectation of profit exists? What if an issuer makes statements that no profits should ever be expected and takes actions consistent with it? Can purchasers still expect a profit? Is that reasonable?

10/ Ambiguity #8: If an instrument is distributed in a way that (a) ties quantity owned or price to a use needing that quantity or making that price logical or (b) has a mechanism to make logical people who purchase it do it only for use, is there an expectation of profit?

11/ On to efforts of others, which focuses on whether the essential (i.e., non-ministerial) efforts of others exist (and likely that those are the efforts from which people expect a profit, though unclear).

12/ Ambiguity #9: Clearly, the issuer’s efforts matter. Efforts of affiliates of the issuer matters almost certainly. But what is the standard for affiliation? What about a small group of people with a close relationship to the issuer?

13/ Ambiguity #9 (continued): What about efforts of people who have nothing to do with the issuer? Does it matter whether those people coordinate with the issuer or not? Does it matter whether the group is small or big?

14/ Ambiguity #10: If an issuer states that it will no longer be engaged with a project, can any expectation of profit exist from the issuer’s efforts, assuming the issuer's statement is accurate?

15/ Ambiguity #11: If the issuer actually does nothing to create value but makes no statement to disavow the potential for value creation, can any expectation of profit exist from the issuer’s efforts?

16/ Ambiguity #12: If the issuer is such a small part of everything going on in the ecosystem around a protocol that people count on others to create value, can any expectation of profit exist from the issuer’s efforts or are they not essential efforts?

17/ Ambiguity #13: If the instrument holders control decisions that impact the instrument's value, whether through direct changes or contractual rights to control others’ activity, are their own efforts driving the value and not those of others?

18/ Ambiguity #14: If the answer above is no, then what about if the holders lose their rights in the instrument if they don’t use the control rights that come along with it?

19/ Ambiguity #15: If something is an investment contract, will it forever be an investment contract or can it cease to be an investment contract (see FinHub’s digital asset framework where SEC staff convey that morphing of investment contracts may be possible).

20/ Ambiguity #16: If Howey is satisfied with one group of instrument holders, can Howey fail with respect to another group of identical instrument holders (e.g., can private investors hold tokens part of an investment contract while public recipients do not)?

21/ How do these ambiguities manifest in crypto?
a. Non-security token airdrops benefit the issuer but the recipient gives up no value. Outcome? In merkle distributions, issuer benefits and recipients pay gas, giving up value, but it's not to the issuer. Outcome?

22/
b. Peg a token to a dollar with a fiat dollar in reserve (i.e., a stablecoin) but not keep it in a walled garden (see two SEC no action letters allowing it in a walled garden).

23/
c. Peg a token to a dollar with only wrapped bitcoin (clearly not a security) in reserve.
d.Peg a token to a dollar with only an algorithmic mechanism to keep the price stable.

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e. Issue a token and state that issuer’s only goal is to keep its price in a tight band near $1 but without a stabilization mechanism.
f. Issue a token with no backing and no functionality and the issuer states it will do nothing with the token at any time.

25/ Because of the 25 tweet limit, I continued the thread here:

https://twitter.com/boironattorney/status/1456639522536497163?s=20