Thread by @RoyPrice

Fraud is illegal by statute and common law. The DOJ and state ag’s can pursue criminal and civil fraud cases. Private citizens have a right of action. The SEC was not created to police fraud in general. It exists to regulate securities only. #ripple #libry #howey

2 Let’s say we were starting an açaí farm, Hi Açaí.

We also set up a global açaí wholesale açaí marketplace with its own ERC20 token — the Juice.

3 We also set up an NFT. People can buy the NFT and become part of the Açaí community. There is a DAO associated with the NFT that creates some rules for the Açaí market, develops an açaí cookbook, and produces an Açaí newsletter.

4 To limit our liability and organize our business, we create a c corp and sell shares in it. These are Reg D 506(c) exempt securities. Each share grants its holder .1% of our business.

5 So we are selling the following things:
⁃Shares in Hi Açaí, Inc.
⁃NFTs
⁃ERC20 tokens ($JUICE)
⁃Açaí berries

6 As açaí berries become more popular, the business becomes profitable and activity on the marketplace grows. Demand for Juice rises b/c people need it to settle transactions, so the value per Juice rises. The value of the NFTs rise as interest in açaí berries grows.

7 Some people, to be sure, buy the tokens just as financial speculation. That can’t be helped.

8 So which of these are securities?

Only the shares in the C Corp should be securities (and buyer’s motives for buying, which are hard to know anyway, should not matter).

9 The key should not actually be the four prongs of the Howey Test. Getting to the Howey Test depends on something being an “investment contract.”

10 As discussed in Ripple’s response to the SEC’s summary judgment motion, there is an extensive jurisprudence around what an “investment contract” is. Firstly, it must be a contract. dropbox.com/s/qnbvzhurmipk…

11 The 506(c) securities are clearly securities but are exempt and are handled within the Reg D rules.

12 Buying berries by the side of the road is clearly not an investment contract.

13 The ERC20 token is not a contract. It does not give you any rights to anything other than the token itself. If Hi Açaí shut down its marketplace but nevertheless became a $1B açaí business, and Juice became valueless, owners of Juice would have no claim.

14 They have no claim on any Hi Açaí asset. They own nothing but a token. By the plain meaning of the term, that is not an “investment contract.”

15 Pushing straight to the four Howey prongs is a sort of rhetorical trick to get courts to already assume that things are securities.

16 The NFTs, like the ERC20’s, convey no rights except to their jpeg. There is no agreement associated with them except whatever very limited assurances wrt minting that may be in the smart contract.

17 Let’s take an alternate set of facts. What if the açaí marketplace had failed and Juice became valueless? Further, what if the promoters had promised that Juice would be a good investment as the company thrived? Is it now a security?

18 I would say it is not because it is simply not an investment contract.

Is this unjust? Is there to be no remedy for Juice speculators?

19 Remedies are plentiful. State AG’s, district attorneys, and private plaintiff’s attorneys stand by with fraud claims. They just have to prove the elements of fraud to prevail. Justice in America does not depend solely on the SEC.

20 What would the substantive difference be if courts accept that the SEC only has jurisdiction over securities, which must be investment contracts, which must be contracts?

21 The difference would be that claimants or prosecutors, would have to prove the elements of fraud instead of just showing that someone issued something. That’s probably how it should be — good faith actors are ok. Bad actors aren’t.

22 What if the DAO had a governance token that had the exclusive right to vote to distribute DAO revenues to holders? That actually could be a security because holders are granted a substantive right upon purchase and have an protected, exclusive claim to cash flows.

23 Howey is an interpretation of statute and thus can be revised or clarified by statute. Here’s hoping that the 118th Congress can step in and clarify an area that is important to innovation.