[iMuzz]

> I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.

> We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike. I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so.

I don't know much about Jay Clayton (SEC Chairmain) but he seems to be taking a very pragmatic stance on tokens. From what I gather, he's saying that some of these tokens should be classified as securities, while others should not. And we as investors should be be diligent to probe the creators to see if these tokens are subject to regulation and are legal.

This is amazing! The SEC haven't quite stepped in yet. But I fully expect them to. And this gives some great insight into what we can expect in the future.

[modeless]

I think this is more negative for ICOs than your quotes imply. Look at this:

> 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.

[zemo]

> almost all ICOs so far are illegal.

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?

[jessriedel]

No, your definition is based on the textbook definition of speculation, i.e., that the owner values the thing not because of its intrinsic value to him but only insofar as he can sell it to someone else later. As Kadin points out, the actual definition of a security is (basically) a claim on property or future profits, which is logically distinct.

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.

[Jd]

The textbook definition of a security is expecting to profit based on the efforts of a third party.

[jessriedel]

The definition in Kadin's comment that I reference is more exact.

[runeks]

With what money will you buy the security unless you, yourself, have exerted an effort? You’re profiting from the money you’ve earned through exerting an effort, followed by foregoing consumption, resulting in surplus capital with which you can purchase the security.

[bufferoverflow]

How many ICOs "advertise as being sure to appreciate"? I've looked at like 40 different ones, bought into none, but none of them promised any return on investment. That's some straw man argument.

[ianamartin]

All of them. The more coins have been mined, the fewer are left to mine and the harder they are to mine.

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.

[eudoxus]

Seeing as most ICO are ERC20 tokens on the Ethereum chain you are most certainly incorrect about your deflationary theory implying appreciation. Since most ERC20 tokens are 100% premined and sold during the ICO, there is no concept of "mining" with those ICOs (except maybe Minereum :p ).

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

[dkersten]

If they’re “pre-mined” then surely there is already a preset limited amount of tokens?

[drumdance]

They don't advertise that because their lawyers told them not to. There are lots of ways to dance around this and imply appreciation without stating it.

[Kadin]

This is the (literal) textbook definition of a security:

    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]

It's a somewhat circular definition, but my reading is that basically, anything whatsoever that gives you an ownership interest or claim on the future profits of an enterprise can be construed as a security. You can track who owns the shares of the enterprise via entries in a central ledger (the current method for most stock companies), use paper bearer certificates (traditional way), use a distributed ledger, hand out carved pieces of pottery, whatever. If it functions even remotely like a security, it's probably a security.

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

The Howey Test is reliable in the sense that anything satisfying those four points is extremely likely to be an investment contract and thus a security, but I believe there are probably securities that fail one or more aspects of the test but are still regulated, due to the broad statutory definition of "security" under the 1934 and 1940 Acts.

[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...

[Jd]

Here's the earliest legal work on this stuff which will probably interest you:

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

[sillysaurus3]

Mobile friendly. (Mostly because I'm on mobile and no way am I going to swipe back and forth 40 times to read this):

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]

[elmar]

> 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

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

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 

yes, electricity and hardware are equivalent to money

  2. There is an expectation of profits from the investment  

yes

  3. The investment of money is in a common enterprise   

yes

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

yes, from Satoshi the original promoter and all subsequent miners.

[randomsearch]

Fails on (2). The only reason you expect to profit is you think (without rationale) that the value of the coins will increase. That’s pure speculation.

[Frogolocalypse]

You fail on number one I'm afraid, and go down from there. 1. By that rationale, buying baseball cards is buying a security. Maybe if you were the ISSUER of the cards, you'd have a point. But even then, it's tenuous. Maybe if they were selling pre-release cards? 2. So baseball card buyers are buying securities? 3. Where is this supposed bitcoin enterprise? 4. Where can I buy these coins from satoshi?

[elmar]

Using the "Howey Test" even CryptoKitties should be regulated by the SEC!

[freeone3000]

The IRS considers them securities for capital gains. I'd be surprised if the SEC saw it differently.

[complexmango]

Forget about technical definitions for a second, and consider a practical view from a businessperson.

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.

[phaed]

> Basically, almost all ICOs so far are illegal.

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.

[eximius]

Legally speaking, are they on the hook if they merely say that and don't take preventative measures against US citizens? It could come back to haunt them if they ever want to expand to the US down the road and didn't take precautions.

[londons_explore]

A simple dropdown saying "citizenship" and then turning red with an error message saying "United States is not allowed. Did you mean United Kingdom instead?" will encourage most people to put something else.

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"

[tfha]

My understanding is that the SEC expects you to require proof of an alternate citizenship via a passport. Simply having a drop-down that users can lie about by clicking a box or using a VPN is not good enough.

[AlexCoventry]

Yes, they are on the hook in that case. (Not lawyer, not legal advice.)

[AlexCoventry]

Unless they're using expensive KYC procedures, I doubt that many ICOs have done enough to exclude US investors that the law will excuse them from SEC regulations.

[Kiro]

Why would I care what the SEC thinks if I'm outside the US?

[beagle3]

Because of FATCA and friends, essentially all financial institutions in the world now report to the US and follow its rules. If you are not a US taxpayer, and outside the US, they don't directly apply to you, but they have already affected the regulations that do apply to you.

[noway421]

This is literally why we need crypto

[killjoywashere]

You should be aware that the decision of jurisdiction can pull you into courts you never knew existed, in jurisdictions you wouldn't imagine could exist. Finding a country that won't extradite you may become an issue of treaty, or even a string of treaties. IANAL, but I sat in on one of my brother's international law classes, which quickly convinced me to not fuck around in that arena. Lawyer up early.

[ars]

Most countries have securities laws, not just the US.

Are you sure your country doesn't?

[scotty79]

Most countries define security as either equity or fixed income instrument and that's all. Nothing of the US "maybe it is, maybe it isn't ... is there expectatiom of profits? ... so maybe it is or it isn'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.

[sah2ed]

Filecoin's ICO seems to be one of the few exceptions to follow securities law.

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

[Alex3917]

> Filecoin's ICO seems to be one of the few exceptions to follow securities law.

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.

[tfha]

They filed a Reg D exemption, which is different from a registration, but allows you to legally offer securities if you comply with a narrow set of restrictions.

[phaed]

KYC is not expensive when you're raising millions. Most do them.

[htormey]

Here’s a question. I’m a permanent resident (green card holder) who lives in the USA. Is it legal for me to invest in ICOs?

[ikeboy]

Most of the benefit of doing an ICO is that investors are throwing a ton of dumb money into ICOs.

[modeless]

Exactly. And SEC regulations are designed to stop dumb money from going into risky investments. If you comply then you can't cash in on that dumb money and there's no point to doing an ICO.

[ikeboy]

A lot of that dumb money is being put in by wall street, so not sure you're right.

[modeless]

This is not my impression. It seems to me that the dumb money is people who made early fortunes in crypto or regular people looking to ride the next pump and dump. If Wall Street money is coming in it's mostly to take advantage of the dumb money for a quick profit, for example by getting preferential pricing or timing so they can sell to later investors).

[ikeboy]

I think most of the money that's going in is by people with more than the 250k limit. Above that you can market pretty much anything as long as you're honest, I think. So I don't think it would be affected much, except that ordinary users wouldn't be able to use it (unless they could get it on exchanges, which may be under different laws?)

Not a simple question, I guess.

[username223]

> If Wall Street money is coming in it's mostly to take advantage of the dumb money for a quick profit,...

Examples? Is Goldman playing in the current bubble?

[mrschwabe]

Is dumb money also considered money that is going towards free speech activists?

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

[api]

There is a second benefit.

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.

[everdev]

Important second line to that quote:

"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.

[couchdive]

and probably requiring Accredited Investors only at some point, which probably 90 percent of crypto folks aren't, myself included.

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.

[dahdum]

It's just the income or $1M net worth excluding primary residence. The $5M is for business entities.

[couchdive]

thanks for the more detailed and accurate info!

[AnkhMorporkian]

90 percent? Probably close to 99. While a significant portion of crypto is probably owned by rich people, the vast majority of actual owners of crypto is owned by people who make far less than that.

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.

[charlesdm]

They seem to be approaching things in quite a pragmatic way, which is great.

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.

[wmf]

he's saying that some of these tokens should be classified as securities, while others should not.

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.

[iMuzz]

> Every single existing token is either a security or a commodity

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.

[wmf]

But no actual tokens work that way because no one would get rich off them.

[maneesh]

Volts work that way. Earn crypto for doing healthy habits. Use it to unlock new apps and courses for behavior change.

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

[wmf]

And you're the founder/CEO; what a coincidence!

[Alex3917]

> he's saying that some of these tokens should be classified as securities

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.

[Frogolocalypse]

Not 100%, but a lot, for sure. I definitely read it as most.

[notyourday]

> This is amazing! The SEC haven't quite stepped in yet. But I fully expect them to. And this gives some great insight into what we can expect in the future

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.

[fergie]

If nothing else, the current bitcoin adventure is raising a general awareness of the nature of currency- that is, something that primary exists to be means of exchange, and not something that primarily exists to store value.

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

[Frogolocalypse]

I think that is a very considered and wide ranging statement. The proof is in the pudding though. He looks like he has called out some ICO's, but until enforcement proceedings start, it is still not clear. I can't see how any pre-mined ICO, like ripple, wouldn't be treated like a security given those statements.

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.

[panarky]

> if you can't mine it yourself, or get someone independent from the issuer to do it for you, it's 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.

[Kadin]

This is basically correct. If the thing you're buying gives you a claim on the future profits of an organization, it is probably a security under US law.

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.

[tomjakubowski]

There's a company called Fantex that teamed up with pro athletes to do just that. https://en.wikipedia.org/wiki/Fantex

[Frogolocalypse]

> a card that entitled you to some fraction of that baseball player's future income

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

Call it : sportico!

[luka-birsa]

We're at a stage where if you have an idea for an ICO, it's probably already funded. This is a great example - SportICO already exists and it's called SportyFI - https://icomagazine.com/sportyfi/. Raised 5M USD during the ICO.

[Frogolocalypse]

And here i thought i was being clever...

[gt_]

If I’m understanding this correctly, a big difference is the potential for the value to fluctuate in relation to fiat. All of these examples are measured in denominations of US dollars. But, if these tokens are viewed as products rather than currency, therein lies another question. Is there a way to reach a conclusion on that?

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.

[lojack]

I don’t understand why being premined makes any difference? A company could easily create an equity pool and a new mineable currency, and make that currency worth a proportional amount of equity. That would very clearly fall under the umbrella of security. Similarly someone could create a premined currency and evenly distribute it to anyone who asked for it, in exchange for nothing with no guarantees about it being redeemable for anything. That may not be considered a security.

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.

[derefr]

If anyone can mine a thing for themselves (i.e. create more supply of it), then that thing is a commodity. (Gold, for example, is a commodity.) By definition, no one entity can really restrict the supply or trade of a commodity; and thus the government can't really make useful laws about what any one entity does with their holdings of a commodity.

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.

[sah2ed]

Not disagreeing with your observation, but to extract gold, you need a mining license which is typically required by law, so in a way governments can still make useful laws that regulate the scarcity or abundance of gold as a commodity by pricing mining licenses accordingly.

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

[moreless]

> 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."

[YuriNiyazov]

That's a very interesting way to distinguish the two, and the first time I am seeing it presented this way. Did you come up with this? Are there references?

[Frogolocalypse]

That's a really interesting insight. Thanks.

[Alex3917]

> I don’t understand why being premined makes any difference?

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.

[stale2002]

Well, it is not about pre-mining specifically that makes it a security.

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.

[jcoffland]

Who's premining and then handing out all the premined tokens at random?

[wbl]

If you buy bitcoin you aren't buying it from the author of the bitcoin client to fund further development. I'm going to say not a security transaction.

[ojr]

the founder of bitcoin gave himself/herself a mining headstart with low difficulty, this can be seen as a founder reward

[xorcist]

Not only is that not true. The founder of Bitcoin even took the additional steps of proving in the genesis block that he did not give him/herself a headstart. In fact, even that block containing the proof itself was made inspendable on purpose.

[ojr]

did they make the first million bitcoins they mined unable to spend? No founder reward means no mining so it is very true, there was an advantage, the crytokitties creators are not allowed to breed kitties, but take a cut from every sale which is more fair

[Frogolocalypse]

What's funny in bitcoin, of course, is that none of those coins were sold, nor were they offered for sale.