> By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.

Basically, almost all ICOs so far are illegal. He says that it's possible to make an ICO that isn't illegal by following SEC rules, but I would be surprised if a single existing ICO actually qualified because most of the benefit of doing an ICO comes from not complying with the regulations.

a lot of them are offering to sell you an asset that they advertise as being sure to appreciate, with the subtext that you will sell the asset at a later point for a gain. Selling something purely to be a store of value and appreciation is basically the textbook definition of a security, isn't it?

A tulip can be speculative, but it's not a security. A non-transferable share of stock is a security but it's not speculative.

It's guaranteed scarcity. By design. All you have to add to that formula is the idea that there's a demand. And that's what every ICO is: hype about demand for a decreasingly available thing.

Once you have been sold that there's a demand, the appreciation is guaranteed by definition of what it is.

Please avoid making generalized statements, especially ones that are flat out wrong.

    any note, stock, treasury stock, security future, bond, debenture,
    evidence of indebtedness, certificate of interest or participation in
    any profit-sharing agreement, collateral-trust certificate,
    preorganization certificate or subscription, transferable share,
    investment contract, voting-trust certificate, certificate of deposit
    for a security, fractional undivided interest in oil, gas, or other
    mineral rights, any put, call, straddle, option, or privilege on any
    security (including a certificate of deposit) or on any group or index
    of securities (including any interest therein or based on the value
    thereof), or any put, call, straddle, option, or privilege entered into
    on a national securities exchange relating to foreign currency, or, in
    general, any interest or instrument commonly known as a “security,” or
    any certificate of interest or participation in, temporary or interim
    certificate for, receipt for, guarantee of, or warrant or right to
    subscribe to or purchase, any of the foregoing. [1]

EDIT: The Supreme Court's "Howey Test" [2], which came out of a 1946 case over complex real-estate leaseback deals, is in some respects a simpler method to determine whether something may be a investment contract, which is a security:

  1. It is an investment of money    
  2. There is an expectation of profits from the investment   
  3. The investment of money is in a common enterprise   
  4. Any profit comes from the efforts of a promoter or third party

[1] That's from the Investment Company Act of 1940, which seems to be definitional; there are some other definitions used elsewhere in the UCC and other Federal laws (largely from 1934), but they seem to be similar, and quite a few places punt to this definition. (Quoted in http://apps.americanbar.org/buslaw/newsletter/0014/materials... which is an annoyingly "locked" PDF that you will need to de-DRM; this is left as an exercise to the reader.)

[2] http://consumer.findlaw.com/securities-law/what-is-the-howey...

https://coincenter.org/entry/reporting-back-from-the-blockch...

any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. [1]

------------

Using the "Howey Test" on Bitcoin you find that Bitcoin and almost all other cryptocurrencies should be considered securities.

  1. It is an investment of money 

  2. There is an expectation of profits from the investment  

  3. The investment of money is in a common enterprise   

  4. Any profit comes from the efforts of a promoter or third party.

A share of stock in a publicly traded company is a legally recognized right to the earnings/assets of the company. Of course, the company may choose to distribute the earnings, or reinvest them for greater future earnings/assets. However, all ICOs I've seen so far bestow no legal right to $$ denominated earnings/assets of any sort.

So an ICO to purchase a cashflowing asset (e.g. an apartment building) gives the owner of the token ZERO legal right to claim any of the cash from the rent collected or proceeds from a sale of the apartment building. However, the owners of stock in the corporation that purchased the building definitely have legal rights to the cashflow/proceeds from sale etc, even if their purchase was facilitated by the sale of virtual tokens. They have no legal obligation to pay the token holders anything whatsoever.

This is an over-simplified example to drive the point home.

They are only illegal in the US if they allow US citizens to participate, and the majority ban US citizens. So I think you have it backward.

Then the company can fairly legitimately say "The customer lied to us about their citizenship. We took all reasonable measures to determine their citizenship, because there isn't a freely available database of which people have which citizenships"

Are you sure your country doesn't?

My country has a list of things that are securities written into the law. Until they write in there crypto tokens they are not securities.

https://www.cryptocoinsnews.com/filecoin-ico-raises-record-2...

The SEC commissioner said that no ICO has registered as a security so far. Given that Filecoin was one of the only ICOs to openly advertise themselves as being a security, it seems like they could be in even more legal trouble than everyone else.

Not a simple question, I guess.

Examples? Is Goldman playing in the current bubble?

Why do you think the SEC should be arbitrators of what and what is not dumb money?

Right now the crypto space is like the entry point of an MMORPG. Picture a bunch of dollars entering and then walking around and trying things. "What do I do here?" "How do I play?"

Obviously it's bubbly but that's not the point. The point is that all this new money entering the crypto space is looking for something to do.

Putting out an ICO will attract some of it. It is not accessible in any other way.

... and unfortunately ICOs and crypto have sucked a lot of the air out of conventional crowdfunding, equity crowdfunding, and small time angel investing. So crypto is where the money is and you have to go crypto to reach it.

It's dumb but markets are not rational.

"A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed"

They're saying it's fantastic, just do it legally. And for any offering that passes the Howey Test, that means registering with the SEC.

Accredited investors must make 200 to 300k annual (dual income allowed) and/or have 5 mill in tied up assets and/or a net worth of over 1 mill.

For every millionaire out there who is investing in crypto, there are a few hundred people who just want to buy things off the dark web.

This is a space that will grow in the coming years, and while there will be growing pains / abuses along the way, this might end up being a new, valid and accepted method of raising international funding.

All the actors just need to get comfortable with this and figure out the best way to approach this.

Gotta love the unlimited supply of optimism in the cryptocurrency world. Every single existing token is either a security or a commodity, but people still think they can squeeze through the "utility token" loophole.

My optimism could totally be misplaced! But here's an excerpt from the SEC statement that seems to go beyond your "security or commodity" classification.

> A key question for all ICO market participants: “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.

It becomes a lot easier when you realize money isn't real, it's a constraint. Like oxygen, it only matters when you don't have it --- once you do, it becomes irrelevant -- a story that allows you to represent incentives to do positive deeds.

https://pavlok.com/volts

If by 'some' you mean that some future tokens might be able to be offered for sale legally, then yes. But he also just declared basically 100% existing token operations to be criminal.

In my view, the biggest issue that we currently have is that SEC is not going after attorneys and accountants who are facilitating these schemes. Do note that I'm not talking about a company performing ICO hiring a law firm to do it correctly, crossing the Ts and dotting the Is. What I'm talking is SchmoeCo going to a law firm specializing in ICOs ( sidebar: can you even believe that there are now law firms that specialize in ICOs?! ) basically disclosing that their ICO is a gigantic fraud scheme and those law firms and accountants help them to pull off this scheme, often for a percentage of the money raised.

Going after those firms will relegate the ICO scams and frauds to the pink sheet pump and dump scheme level while letting the legitimate companies to use ICOs to raise money for legitimate even if very speculative projects.

It seems obvious that ICOs should be treated as the sale of securities- its somewhat reassuring to see the SEC endorsing this view.

As a long time crypto investor, even i recognise that ico's are out of control. It is my opinion that if you can't mine it yourself, or get someone independent from the issuer to do it for you, it's a security in everything but name. Any presale token is simply a security towards the coins once released. I can't see how that isn't a security.

That's not quite right.

You could say that WoW Gold is "premined". You can't "mine" it yourself, and it's only issued by World of Warcraft.

Same thing with Walmart gift cards and Disney Dollars.

Call it money, or tokens, or scrip, but it's not a security.

If you sell it to users primarialy to transact with it, it's probably not a security.

If you sell it to fund the development of the enterprise, and buyers expect to profit from that enterprise, then it probably is a security.

If the thing you are buying has only its intrinsic value, then it is a commodity.

An example would be a baseball card (intrinsic value only) vs. a card that entitled you to some fraction of that baseball player's future income over the course of their career. The latter isn't really something that exists, although it probably could, but if it existed it would probably be some type of security.

I think i have an idea for a new ico....

Call it : sportico!

Maybe I am just being pedantic, but it seems most tokens could make an argument that they are products just by the fact that they build a brand and may have a technology that differentiates them from others. I have little hands-on financial experience but the terms of abstraction by which we define what a currency consists of seems like a philosophical topic to me. I am curious how this gets resolved.

It seems cryptocurrency may offer the puzzle piece which illustrates this spectrum of abstraction to a degree which is truly painful. A year ago, I had no idea what a security is, and after reading about them for a year, I am doubting that they exist as a logically defined objective category. Like many things in finance, the concept of these securities appears to be a relative conjurement, dependent not on logical definitions but on contextual gaps of unimaginable forms of abstraction. As cryptocurrency implements the unimaginable, those gaps are filling. We will eventually face a continuum of abstraction limited to philosophies of material.

I tried to read the linked release, got about 1/5 of the way down it and was just incredibly bored. I hate to sound so lazy and will try to read it again later.

The lines become much more blurred when you’re talking about a staked currency where an ICO is necessary to help evenly distribute the coins which are then mined. Honestly, as annoying as this is, the definition is security is so broad that I find it hard to picture any cryptocurrency not being defined as a security.

Any valuable thing that isn't a commodity, is a security. Every fiat currency is a security. Stocks and bonds are securities. Etc. The government can regulate securities (or rather, regulate their issuers, because there is a clear issuer), and so they do.

The definition of security isn't really vague; it's just a definition of exclusion. Replace security with "non-commidty" whenever it comes up and things might be clearer.

Gold ownership was outlawed in the US in 1933 by FDR.

https://en.wikipedia.org/wiki/Executive_Order_6102

EDIT: "The limitation on gold ownership in the U.S. was repealed after President Gerald Ford signed a bill to "permit United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad" with an act of Congress codified in Pub.L. 93–373,[19][20][21] which went into effect December 31, 1974."

The issue is when A) people buying the token are doing so because they expect the value to increase, and/or B) the value of the network comes from a central party or promoter rather than from the network participants. If a currency is pre-mined, then it's more likely to be a security because the network participants aren't helping to secure the network. Similarly, if the product doesn't yet exist, then it's more likely to be a security because the network participants are unlikely to be creating value.

The fact that the token may be pre-mined or the product may not yet exist doesn't inherently matter except to the extent that they make it much more likely the token fails conditions A and B.

Similarly, if Ethereum goes to proof-of-stake then it's more likely to be considered a security, but there isn't a specific law saying that proof-of-stake tokens are illegal.

You could, for example clone Bitcoin exactly, but make a change where you recieve a billion free coins. It would be dumb, but that wouldn't be a security.

The problem is when ICOs premine and sell you a token for something that doesn't already exist yet. The token represents a future promise, as opposed to something that exist right NOW.