Comment by Lazare | Hacker News Reader

Comment by Lazare | Hacker News Reader

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They don't have to be shares; they just need to be securities, and over the last 80+ years that term has been defined fairly clearly and broadly, and ICOs clearly count.

For example, one definition of a "security" is an "investment contract", and what is (or isn't) an "investment contract" is defined by the Howey Test, which looks at whether:

1. It is an investment of money (or other assets)

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 typical ICO very obviously meets all 4 elements, inasmuch as it involves a company raising money via an ICO, where purchasers of the tokens 1) give money to the company 2) expected to profit from purchasing the tokens 3) the money was to be invested in building the company's core business and 4) their hope of profits would depend on the company's actions.

> Owning a token dies not necessarily mean you now own a portion of the company or profits.

That is correct, and one of many reasons why tokens are a bad investment, but it's not actually relevant. Securities come in a thousand flavours.

(And no, the argument that tokens just look like securities, but if you read the fine print they don't actually promise profits or whatever won't fly either. If someone can show they purchased a token based on a representation from the promoter that there would be profits, the fine print doesn't matter.)

Lazare, you said it:

"The typical ICO very obviously meets all 4 elements, inasmuch as it involves a company raising money via an ICO..."

Do we really know what a "typical ICO" is at this stage? And as fast as the sector is changing, how do we know what will be typical by the time new legislation is

(a) passed and (b) enforced?

Many (typical?) ICOs are not companies, registered as foundations to support free, open source software with crystal-clear terms of the token distribution:

Which explicitly state that it is not an investment and that it is likely that participants will lose all of their money.

This is just one exceptional example, and many more will follow.

Forward-thinking jurisdictions such as Switzerland which understand and actively support ICOs are quickly developing a strong competitive advantage against the more regressive ones.

> Do we really know what a "typical ICO" is at this stage?

Yes, we can look at the ICOs that have happened and draw conclusions.

> And as fast as the sector is changing, how do we know what will be typical by the time new legislation is (a) passed

This isn't about new legislation. The Howey Test dates from 1946. The fundamental characteristics of ICOs are not new (and have nothing to do with blockchains).

> Many (typical?) ICOs are not companies

I have no idea why you think this changes anything. It doesn't.

> Which explicitly state that it is not an investment

As I already mentioned, fine print doesn't fix the problems being discussed here.

Lazare,

You've selectively skipped over critical parts of my argu ment. But never mind... ;)

From your perspective, even in-game virtual limited-edition collectors items that might appreciate in value could be considered "securities". As would limited edition digital art work or, let's say, protected hashes of such works.

Or a limited gift voucher to purchase the first edition of a product funded by Kickstarter....

Basically you can try to draw conclusions of what a typical token crowd sale is or isn't at this stage, but -- at least in my view -- you would probably be jumping to a superficial conclusion.

> This isn't about new legislation. The Howey Test dates from 1946.

Which may or may not be suitable for technology developed and used in 2017, let alone 2018, 2019 or further down the road. So you're completely missing the point.

But if your only argument is that government authorities "could" interpret the law in the most aggressive way, few would argue.

> even in-game virtual limited-edition collectors items that might appreciate in value could be considered "securities"

If they were being marketed as an investment, yes, of course. "Buy a limited edition Golden Sword so we can launch our new expansion; you'll make a huge profit when you resell it to the people who join after we ship the expansion!"

That would fairly clearly fall afoul of the SEC; they don't care if you call it a "Golden Sword" or an "no-lose investment contract"; they care about how it behaves and (especially) marketed by the promoters. Scammers are constantly looking for new ways to package the same old schemes.

And because it would be so clearly illegal, no legit game company does that. Similarly, Kickstarter will shut down a project in a heartbeat if they even hint at doing something shady with the promotion. Did it ever occur to you that there's a reason why your examples of other equivalent things that would also be prosecuted by the SEC are all hypothetical? It's because if they existed, they'd be prosecuted by the SEC.

> Which may or may not be suitable for technology developed and used in 2017

But is undeniably applied to the technology used in 2017. This is like Zenefits arguing that laws about insurance brokers are totally not relevant to the new internet-enabled 21st century. Turns out, those laws were very relevant to Zenefits.

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

Some US securities experts have opined that a token where a holder can only earn a profit from holding the token in conjunction with their own efforts in utilizing the rights that the token provides them is not a security token.

It is more akin to a franchise or software license. The argument has also been made that the existence of a secondary market where these tokens are traded, and where these tokens can appreciate in value, does not make such a use-token a security token. A license or franchise right can also increase in value over time through secondary market trading, and neither are securities.

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