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Comment by TaylorGood | Hacker News Reader

Ponzi aside, let's say it's the greatest cryptocurrency idea. The SEC has right to use their Howey Test to determine whether it's a security. Based on 1,2,4 below, is this not ICO's?

Under the Howey Test, a transaction is a security (or investment contract) if:

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

Based on their recent cyber division being announced, there is seemingly a strong possibility of review/conviction if launching an ICO as a US citizen, no? Soliciting an unregistered security carries 20yr prison term. Are dev's factoring this as possible risk?

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It seems that in practice, yes, most people who are buying into ICOs have an expectation of profits based on the actions/development/promotion of a third party team running the project. Matt Levine talked about some of the nuances of this back when the SEC released a report about the DAO[1].

A couple days ago, I stumbled across a blog post of the Colony.IO project[2], who are creating a token and blockchain platform for distributed organizational management (coincidentally similar in concept to the DAO). They go into detail about their plans for having an ICO only once they have a product actively functional. The hopes are that with a working product, people buying the tokens will do so with the expectation that it is a sale of services, rather than an investment security. Now, their perspective is that of the team and their lawyers, and not necessarily that of the SEC. But if there is hope that ICOs won't all be securities, I think that is the pathway.

[1] https://www.bloomberg.com/view/articles/2017-07-26/tokens-va...

[2] https://blog.colony.io/the-colony-token-sale-7ac14c845bc0

So wouldn't that be more of a pyramid scheme rather than a ponzi scheme?

I'm not sure exactly what you are asking about. I was focusing on the distinction on whether a coin would be considered a security or not. As far as I understand it, one could operate in a fraudulent manner (or not) regardless of that distinction. In order to not run afoul of securities law, companies have to either ensure that they are following said laws or avoid dealing in securities.

If you're referring specifically to Colony.io, then I have no idea. I just read their blog post.

As a crypto-developer working in the blockchain space, my primary company has opted to do an ICO as part of its operations. The company has existing VC backing of between 4-10 million, and the project would benefit from blockchain - for one aspect. By no means is a new token necessary, but that fact seems to have been side-stepped. The product exists, and perceivably the token could be usable upon issuance...

I enjoy working on the crypto for the project, but I concern myself with the eventual legalities of the ICO and how it might change the companies incentives internally.

I have bills to pay, leaving on principle alone isn't viable for me, but, if it could impact on my family, I will.

I am not a lawyer, and the answers don't appear to be black and white.

Same. A quick chat with an attorney who is an SEC specialist basically said "if it breathes" i.e. involves money that ICO is seen as a security. The SEC putting together the digital division which covers cryptocurrency tokens is part of what led to him saying this. Basically fish in a barrel.

It is in my opinion that any US-based ICO is now in a lottery as to whether they get the SEC visit.

Not legal advice at all, just sharing an excerpt from a coffee chat.

What was your decision? Did you stay or leave?

Pass.

Not sure why this isn't discuss more, but Erik Vorhees was fined for not registering as a security back in 2014: https://www.sec.gov/news/press-release/2014-111

Although it was just fines, not worth the exposure just for merely operating an above-board business. With SEC now having Cyber Unit, in theory their regulating now increases.

Can you ask him how a virtual currency can also be a security? Tulips could be a security, OK; but, didn't the Securities Exchange Act of 1934 exempt currencies from being considered a security?

Found this interesting, and relatable:

https://www.sec.gov/news/press-release/2014-111

I’d suggest reading The Colony blog for an idea of what lawyers are saying.

I'm not a lawyer but from what I've read, the Howey Test is more specific than 4 would suggest.

An unqualified read of 4 would count digital pokemons as securities. The effort has to be in the active management of the enterprise, and most of the profit has to come from this management - as you'd see in someone running a business - for the investment to be deemed a securities transaction.

In the case of Pokemon, or cryptocurrency, most of the value comes from the activity of the users.

Is "common enterprise" the only distinction between gambling and a security?

Not an answer to your particular question, but semantics seems to be the only difference between insurance and gambling.

If a bookmaker offers you a $500 bet that your house won't catch on fire this year, what is the difference in both intent and outcome?

The law is a fickle beast.

1. is not money, but any money-like value, I believe.

And if 4ths is big enough in your plan so you can't even argue it doesn't play a role, then you probably have a shitty business plan, I'd argue. The profit of course should come from selling some service or product.

How many of the Howey test questions must be "yes"? All? Any? More than x number of them?

They all seem to BE "yes "IMHO. So does it matter that much?

All.

Under this "Howey Test" Bitcoin would be considered a SEC registered security.

Bitcoins aren't issued, they're created by mining and they are used to participate in the blockchain. In particular, there's no third party trying to valorize my BTC.

However if I created a coin the possession of which entitles you to a cut of my bitcoin mining operation, yes that would be a security.

Bitcoin mining is like buying a lottery ticket, you exchange electricity cost for the chance of wining Bitcoins.

You could make the case that Bitcoin main valuation is from the network efect, so other people buying and using Bitcoin increases the value of your Bitcoin.

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