Thus
the SAFTs that were sold in the Filecoin ICO encumber the Filecoin tokes as securities. Thus the Filecoin tokens are useless and can’t be actually used decentralized (
unless hypothetically the common enterprise ceases as explained below).
[…]
Here are the narly details from an attorney:
The question here is whether a token issued pursuant to the terms of a security/investment contract (i.e. the SAFT) is itself also an investment contract. (Which, to this week’s SAFT offering’s credit, is briefly acknowledged in the PPM).
[…]
There is no way to convert a security into a non-security (
except as aforementioned the common enterprise ceases), because that would circumvent the entire point of the law. The investors are not investing in SAFTs but in the Filecoin tokens they receive for the SAFTs. Without the Filecoin tokens, the SAFTs are worthless. The Howey Test states it will always look at the economic reality and ignore any tricks that attempt to obfuscate the economic reality.
It is difficult to divorce the money and exchange component from “utility tokens,” as app-coins are sometimes called, particularly in the context of a speculative ICO where the token allocation is pre-sold to persons who could not possibly consume them all and are purchasing the coins with the expectation of profit on re-sale.
…
For this reason, my personal view is that most ICOs – even the “utility coins” – are unlikely to escape regulation by jurisdiction-appropriate rules regarding public offerings, financial promotions and unfair trade practices. I have held this view since 2014 but then again I’m pretty conservative.
[…]
[…] the blockchain industry’s thinking has over-emphasized complying with regulations that govern the initial issuance of tokens, and has neglected to address the impact of all of the regulations that apply on a continuing basis.
I’m reviewing the
arguments for the SAFT which I had previously discussed in the context of Filecoin, as excerpted above.
The above quoted argument against fully-functional tokens because of a dominating profit expectation, is rebuked in the following SAFT white paper. I was pleasantly surprised to read their logic about free market preponderance, but the problem is the court is going to interpret this, unless the developer has entirely ceased activity before the tokens are issued.
Here are some excerpts from the white paper which I find particularly noteworthy:
Commodities don't have to be physical. A commodity is defined to be a fungible good whose supply is not controlled by any one entity:
"A reasonably interchangeable good or material, bought and sold freely as an article of commerce."
"A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type"
"a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price"
[…]
Duh, Bitcoins are fungible, so they can qualify as a commodity. Non-fungible digital content such as MP3s can not be a commodity.
Proving ownership over a quantity of Bitcoins does require possession of a specific pattern of bits. Which is analogous to proving ownership over gold is having possession of a quantity of gold.
[…]
While it is true that shares of bearer stock equity certificates of an individual issuer company are fungible (i.e. there is no name associated with the certificates so they can be freely bought and sold), they are not divisible, not tradeable in an unregulated exchange markets, and are not a fungible money because the value of the stock fluctuates w.r.t. to the performance of the company, i.e. a form of 3rd party liability. Whereas, Bitcoin like gold has no 3rd party dependence, nearly infinite divisibility, trades on unregulated exchange markets.
Since tangibleness and perishableness are not properties that are shared by all commodities, then they are not attributes of commodities. To reiterate, commodities are fungible goods in which no one entity has control over the supply. They key attributes that distinguish commodities from other goods is that they are fungible and that their supply is not a 3rd party dependency, i.e. we don't depend on any one company to get pork bellies, but we do depend on Microsoft for supply of the Windoze operating system. And for money it is most ideal if the supply is inelastic, which is another minor reason Bitcoin is better than gold for money.
Another difference is that the capital appreciation of company shares are usually tied to a dividend expectation (as evident by the popular P/E metric), which obviously relies on the performance of the company to deliver. Whereas, if token pays no dividend, the capital appreciation is not likely coming mostly from the performance the developer if we’re only talking about maintenance upgrades. However, for significant protocol upgrades such as for example recent hype about various Ethereum developments, it’s not entirely clear that the expectation of profits is independent of Vitalik et al. Although one could possibly argue that the capital appreciation of Ethereum has been more do to the efforts of various free market ERC-20 ventures.
The SAFT wants to eliminate the utility token argument. Many tokens are NOT securitites and are more like metrocards and software licenses, however the SAFT doesn't care and essentially creates a securities where there is not. As Cooley admits, the token is often not the security while the SAFT always is. So then why add such a regulatory burden and why limit the amount you can raise and who you can offer to (only Accredited Investors (i.e. high net worth)? (rhetorical question)
Furthermore, what protections do the SAFT provide once the tokens are delivered? Are the tokens now treated as restricted securities, meaning that you must hold your tokens for a year or more before selling them? That seems like a major drawback for anyone buying tokens for short to medium term investing.
The quoted portion is ignorant and incorrect bullshit.
The SAFT white paper clearly explains that the SAFT is a way of avoiding issuing a pre-functional token, which is likely to be classified as a security. The functional token that is ultimately issued must be a non-security.
The SAFT shares are the security, not the token.
