Topic: Which crypto-coins are "investment securities"? Implications? - page 3. (Read 6047 times)

Are you seriously trying to cite an "invitation for comments" from some law firm as a legal precedent having valid legal standing in USA law?

I mentioned "pork bellies" as a good example. Although pork bellies are not traded on Chicago Mercantile Exchange since 2011, the legal analysis of "When and how a pig can become a security subject to regulation?" is still a valid exam problem for the law students.

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And my points are:

a) you have no legal training
b) you seem to lack even amateur's appreciation of https://en.wikipedia.org/wiki/Adversarial_system and how it applies to a common law land like USA
c) you are misapplying reasoning rooted in https://en.wikipedia.org/wiki/Inquisitorial_system to an old case from 1946 https://en.wikipedia.org/wiki/SEC_v._W._J._Howey_Co.

d) you seem to be searching for a https://en.wikipedia.org/wiki/Affirmative_defense loophole to https://en.wikipedia.org/wiki/Securities_Act_of_1933#Regulation_S

While I understand and commiserate with your general position about societal over-lawyering I also observe that your legalistic divagations are of very low quality.

Much better divagations were posted by John Nagle in 2011:

https://bitcointalksearch.org/topic/a-few-questions-about-glbse-46486

but regretfully many of the links are no longer working. The AdSurfDaily case he mentioned ended in imprisonment of Bowdoin in 2012. It would be a much better source for a precedent involving cryptocurrencies in 2015 than some old cases from the 1st half of the 20th century.

IMO the coins which promise dividends are definitely securities.  That doesn't include staking rewards.  If a coin doesn't pay dividends in another currency or coin, and it isn't advertised as a share of ownership, then it wouldn't fit all definitions of a security.  It might fit the narrow definition regarding management, but it would simultaneously fit the definition of a currency or commodity. 

This is related to whether Bitcoin is classified as an investment security. As well as any other crypto-coin.

Do you not care if Bitcoin is legal or not?

Why would you assume this thread is not related to Bitcoin? I specifically mentioned Bitcoin upthread. Maybe because you didn't read the thread and just aren't interested? Or is it because there is a preponderance of discussion about how to crowdfund a coin to try to avoid classification as investment security? Note that has not been the only mode discussed nor is it the only choice in the poll, nor is this thread closed to discussions of the other choices in the poll, one of which applies to Bitcoin.

Also would Blockstream side-chains denominated in BTC and two-way pegged to the Bitcoin block chain, not apply to Bitcoin? Would how side-chains are structured so as to not be illegal unregistered investment securities not be relevant to BTC?

Is this topic related to bitcoin? I assume no, so it should be moved to the Altcoin Discussion.

Sorry those are securities as defined under the law:

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Well almost anything one can do in life could make one culpable to multiple jeopardy  when considering the vagaries of a multiple of legal systems and common laws. My point was to address the reasonably well defined securities regulatory law where it is so encoded. I considered the USA and EU (not each EU country) for starters.

It seems to me that if what you've done is reasonably in line with the very strict USA securities law, you've done good disclosure (i.e. enumerated risks, what you provide and don't provide, etc), and you've done a fair deal and not egregiously harmed any one, then the risks are about the same as committing 3 felonies a day just by breathing.

False. "Pork belly" is not a security. "Pork belly futures/options/participation shares" were securities subject to the regulation and oversight.

Miscommunication. You seem to be thinking of USA exclusively. I'm writing to a worldwide audience because this forum is not limited to the "American" readers.

https://en.wikipedia.org/wiki/List_of_national_legal_systems
https://en.wikipedia.org/wiki/Common_law
https://en.wikipedia.org/wiki/Civil_law_(legal_system)

Now you are grasping at straws.

I talk to people all the time in private messages (and public forum discussions) and gauge interest level. It is completely detached from potentially anonymous buyers of a crowdfund. Polling the market is not a conspiracy.


Well of course you consider anything to weaken a competitor of Monero to be something worth spreading FUD about.

If people aren't dumb, I am sure they can figure it out that developer who has put his life for 3 years into something isn't going to just disappear and let his baby just die. And surely if the product is any good, there will be other devs offering to work on it and receiving donations.

The entire argument for open source is that the community takes over what is worthwhile to the community.

I am simply amazed after all your dogma to me about the glory of open source and nothing can beat Monero because open source always wins then when I talk about using open source to sustain a product after release, you think the users of crypto-currency aren't going to trust in open source. Thus you are saying it isn't open source that is keeping Monero strong but rather some promised control by some key persons such as fluffypony. But did fluffypony ever promise anything?

All posts of course are appreciated, but please do not expect me to just wither when a point appears to have holes in it.


You have a circular illogic. There can't be any security if it didn't meet the Howe test, thus the promotion of said product was not a management of a common enterprise nor the promotion of the sale of a security.

I hope you can see that can't have a promotion of a security, if it never is a security.


Securities law doesn't apply. Nothing met the Howe test so there were no securities involved.


Well yes I guess if you can prove there was a conspiracy to hide that the buyers of the crowdfund were acting in conspiracy with the developer to continue to expect his managerial control and entreprenurial performance while obfuscating it, but then according to the Howe test you also need to prove the money transferred was used in the common enterprise and not just for the personal use of the developer it was transferred to. You could try to prove that the money was a conspiracy for an advance on his salary for future efforts. But the market value of the asset he sold at crowdfund must be taken into account. Since the crowdfund is a market price, I doubt you can make the argument it was for future salary, since the crowdfund contract will expressly state it is not for that.

In civil law you only need to prove the preponderance of the evidence and not beyond any reasonable doubt. But at least that removes the criminal liability.

IANAL, but I spent a lot of time on the meetings with lawyers, including securities lawyers (but not related to cryptocoins).


A) under common law systems:

Your idea of "managerial control" is way to narrow. You've completely neglected the promotion and sales of securities and "managerial control" of said sales and promotion.

Therefore most of your analysis in invalid. One could probably come up with a case where the "security" itself is valid, but was promoted and sold in an invalid way.

B) under civil law systems:

The story is completely different. Under those systems the securities law tends to root in the Roman law concept of "depositum irregulare".

One more thing you seem to be neglecting is that the current prevailing common law definition of "conspiracy" doesn't require a proof of communication between the distributed co-conspirators. It is sufficient for prosecution to show that all "conspirators" acted in furtherance of their common goal.

Then you are putting yourself in jeopardy on economic reality grounds. Even if the fine print says people can cancel, if everyone understands that it isn't really going to happen, then it isn't real.


I understand. I nevertheless consider them to be issues of significant concern, especially when all is taken together.

Actually there is a crowdfunding platform that has refunding at any time before the milestone is funded.

You pretty much know if you have commitments to funding. You talk to people. You gauge market sentiment and the competitive landscape.

I specifically wrote refutations to #2 and #3 up thread.

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Mostly finished means you don't need to hard fork the protocol, because it is very difficult to coordinate hard forks from optional code patches done by volunteers who are not in control in the eyes of the users.

If it crashes, I think the users will most likely accept any patch by anyone that makes it run again. The developer is not the only person who can fix open source. I find it very amusing that you argue with me for over a year (and intensely for a couple of days recently in private) about how great Monero is because of volunteerism and open source, and now when your point-of-view favors my argument you suddenly argue that open source is impotent and only the one dev can fix or improve anything. Makes it seem all the more suspicious that you are not sincere and have an agenda. Maybe you just don't like to ever lose any public debate.


Othe was the one that wrote (in another thread) that hard forks are forced every 6 months. I was basing on his statement. Then you told me recently in private that users could opt out by editing the source code. Now you tell me the clients will continue on working if there is no hard fork. I can only go based on what you Monero folks tell me. I don't hang out in Monero threads.

Okay that is a somewhat unconventional definition. If no one commits to anything then I agree you are likely outside the definition.

But this is getting quite contrived in my view:

1. No commitment for funding.

2. No efforts post-sale by the developer to fix the damn thing if it breaks

3. No efforts by the developer to refine post sale (at least none that are important to success)

Maybe you can avoid problems with securities law, but in practical terms the project seems like a mess of other problems.

A crowdfund can be configured to allow every potentially interested buyer to remove his offer to buy at any time. The terms of a crowdfund are configurable. You could have it set that sale does not take place until the product is ready for sale, and it can also be that every buyer must reconfirm their interest to buy before their purchase proceeds. You might also choose only to start the crowdfund when the product is ready for sale and each commitment is queued until it reaches your threshold, then the money is taken and product is delivered. If threshold is not reached, you could declare the crowdfund a fail and no money changes hands.

So in that case it can be considered a poll and no money has been entered into any consideration, thus your Wikipedia link is inapplicable. But it is good you made these points, because a crowdfund done another way might not be excepted from your point.

From an investment contract point-of-view, when the money is committed (without recourse to revert is probably also important factor) is what matters. Expression of interest to buy is not a monetary instrument. It is a poll.

Note that getting people to buy a crowdfund, will likely involve closing the source code until after the sale. Otherwise others might be emboldened to offer to fork your code and do a free release. You need some momentum going in, so likely you'd want to have something in the protocol where the open source is automatically revealed after a set period of time. Will need to think more about this.

Your crowdfunding argument does not work because a commitment to pay by sponsors is itself valuable consideration. It is used by the developer to backstop development and reduce risk (and can be used in other ways, such as to support raising capital from others).

https://en.wikipedia.org/wiki/Consideration#Option_contracts_and_conditional_consideration

I'm also not sure that the definition of crowdfunding necessarily means the developer doesn't get the money until the project is complete. If that's what you mean you should be clear on that, but from an investment contract point of view, it probably doesn't matter.


I guess this is yet another gray area but I'm not really sure what "mostly finished" means here.

If it has all features appears to be "done" but it turns out to crash such that no one other than the original developer can or will fix it then everyone is going to lose all their money. So the developer's efforts or lack thereof may still be critical. I guess that is a market value question too. If the developer says "I won't fix it if it breaks" then what will the ICO price be vs. the case where the developer will fix it? I think very, very different, which argues for the importance of the developer's efforts even after launch, but who knows I might be wrong.


There is nothing in the protocol for that. If no further updates are released (or if users don't install the updates), nothing will happen after six months. It will just keep going forever (assuming people continue to use it and it doesn't crash). The idea of the six month window is to continue to add them on a rolling basis with updates, so no one is surprised. (Off topic for this thread though, if you want to discuss it you know where the Monero thread is.)

I inherited this ability from my very gifted attorney father I think.

The sentence requires the money to be used in a common enterprise with an expectation of profits to be derived primarily from the entrepreneurial or managerial efforts of others. The money from the crowdfunding is not used in any common enterprise. The pre-crowdfund development work is a sole enterprise of the developer until the time it is sold (think about who owns what, the devs owns his work and the investors own their money, until the exchange takes place). The developer takes the money and the money is never used in the common enterprise. The Howe Test requires the invested money to be managed in a common enterprise and the investors to expect profits from the management of those funds invested in the common enterprise.

You are entirely misreading it because ostensibly you did not pay attention to how the word 'used' interacts with the fact that in a crowdfund, the seller is not in a common enterprise (with the buyers of the crowdsale) until he sells and per the Howe test the funds must then be used in that common enterprise formed. But if the developer leaves any managerial role at the point-of-sale and takes the funds raised with him, then he is not subject to the Howe test as specifically worded.


The developer can pledge to be available for ongoing work for donations as desired by any investors that wish to donate to him. He would not violate the Howe test.

I believe also now reading the Howe test more carefully, that Monero may not be culpable, because Monero is not using the money that was invested in the common enterprise. And Bitcoin may fall into the same category. But just to be safe, if it were my coin I would remove things from the protocol that force users to rely on the managerial control of the core devs, such as that forced hard fork every 6 months.

Note Bitshares, Ethereum, and Dash all appear to be very culpable. Exchanges trading those coins should consult with their attorneys about criminal and civil liability for trading unregistered securities.


A developer can make a proposal to do some work. Users can vote by making donations on that specification and other proposals if there are any from any others contractors that wish to do some work. Not all the users have to agree. If the contractor has enough donations to meet his desired remuneration, then he proceeds. The users later decide whether to adopt that work in the common enterprise which only they manage.

A developer can also volunteer work, as he might be a holder of the coin too who wants to exert some of his control over his investment.

You are correctly pointing out that making a coin that is not yet mostly finished doesn't fit well this model. And the market really needs finished coins, not coins still being experimented on. Sell a new coin if you want to radically change the features.

I would endeavor to produce a coin where the major features were set and done.

And the things that need to change are orthogonal to the protocol which no longer needs to change. Separation-of-concerns is a very important design principle for computer science and programming.

"Ongoing enterprise" or "ongoing efforts" is not part of the definition. Selling interest in a time- or scope-iimited project still counts. That's still a common enterprise with profits potentially derived "primarily" from the efforts of others.

If someone privately finances development and then sells it when compete, with no further efforts, then that could possibly work. But realistically what buyers are going to buy that? At best, they will do so only at a very discounted price.

As far as users voting to tell the developer what to do (during ongoing maintenance), seems like a very gray area to me. Giving general guidance is probably not good enough as success may still depend "primarily" on the decisions made by developer. As a practical matter, making all the important design, development, and delivery decisions by voting of generally unskilled users seems unworkable (and possibly even voting by skilled experts). You may comply with securities law but you will violate the laws of successful software development.

EDIT: Also, purely mined coins don't obviously fall within this definition because no money or other consideration is ever given to be used by the developer. (An alternative argument would be that the entire network, as opposed to development, is the enterprise, but then in that case one may question whether the developer has a "primary" role in its success; certainly users, investors, merchants, etc. have a huge role in the success of a currency network.) If the developer premines or instamines and the sells those coins, that begins to move closer.

smooth, law is based on words. We must read words with comprehension, not just ignoring parts of the sentences we do not like.

The red bolded phrases are the salient part of the test I am referring to. To be an investment security requires an ongoing "common enterprise" where the buyer "reasonably expects profits" due to the ongoing "entrepreneurial or managerial efforts of others" in that enterprise. When the developer sells some software and tokens encoded in a genesis block of the protocol of that software, there is no common enterprise. The users take that and decide whether to make it a common enterprise. For example, they could throw away the genesis block if they wanted to and were able to organize themselves to do so.

It can be argued thus that Bitcoin is an investment security. The core developers exert a lot of managerial control in the common enterprise that the users do not. They've even formed a Blockstream corporation around their operation.

Well if you sell a product that meets the specifications you provided to the users, and you have no control over what happens after that, then no one claim you had control and the users didn't. They had the disclosure of what they buying. They had the control whether to buy. They had the only control that anyone had over the tokens after the crowdfund ICO. As long as the lead dev exerts no position of increased control as compared to any other users after delivering the product as specified, then he has had no control.

In other words, the lead dev must cease to have any control once the sale is completed and the users have to decide what to do with what they purchased.

The coin would obviously need to be in testnet for a while to hammer out of all the bugs.

If the users voted on their own volition to hire a dev to make some change to the protocol via decentralized donations, that dev didn't have managerial control. Rather the users did. The other users can veto it by not adopting the new protocol changes.

No.

One and only one link on this thread. I'm getting back to work now.

"According to the Howey test, an instrument is only a security if it involves an investment of money or other tangible or definable consideration used in a common enterprise with a reasonable expectation of profits to be derived primarily from the entrepreneurial or managerial efforts of others."

http://www.legalandcompliance.com/securities-resources/securities-glossary/howey-test-to-determine-if-an-investment-is-a-security/

That is why crowdfunding a movie does not violate securities law, or even a toy, watch, etc. where you get the item as a reward. Coins not so much.

I edited my post to make my source more clear. I know you are busy and sorry to burden you, but isn't this really important?

Do you have any pointer that can lead me to type of references you are thinking might support your opinion?