The substantive paper excerpted and linked below delves into the issues raised in great detail. Looks like the lawyers are rooting around in the blockchain for real now!
The spectacular growth of tokens sales has caused some to argue that these sales simply serve as new tools for hucksters and unscrupulous charlatans to fleece consumers, raising the attention of regulators across the globe. A more careful analysis, however, reveals that blockchain-based tokens represent a wide variety of assets that take a variety of forms. Some are obvious investment vehicles and entitle their holders to economic rights like a share of any profits generated by the project. Others carry with them the right to use and govern the technology that is being developed with funds generated by the token sale and may represent the beginning of a new way to build and fund powerful technological platforms.
Lacking homogeneity, the status of tokens under U.S. securities laws is anything but clear. The test under which security status is assessed — the Howey test — has uncertain application to blockchain-based tokens, particularly those that entitle the holder to use a particular technological service, because they also present the possibility of making a profit by selling the token on a secondary market. Although the SEC recently issued a Report of Investigation in which it found that one type of token qualified as a security, confusion surrounds the boundaries between the types of tokens that will be deemed securities and those that will not.
Blockchain-based tokens exhibit disparate features and have characteristics that make current registration exemptions a poor fit token sales. In addition to including requirements that do not fit squarely with blockchain-based systems, the transfer restrictions that apply to the most popular exemptions would have the perverse effect of restricting the ability of US consumers to access a new generation of digital technology. The result is an uncertain regulatory environment in which token sellers do not have a sensible path to compliance.
In this Article, we argue that the SEC and Congress should provide token sellers and the exchanges that facilitate token sales with additional certainty. Specifically, we propose that the SEC provide guidance on how it will apply the Howey test to digital tokens, particularly those that mix aspects of consumption and use with the potential for a profit. We also propose that lawmakers adopt both a compliance-driven safe harbor for online exchanges that list tokens with a reasonable belief that the public sale of such tokens is not a violation of Section 5 as well as an exemption to the Section 5 registration requirement that has been tailored to digital tokens.
Rohr, Jonathan and Wright, Aaron, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets (October 4, 2017). Available at SSRN: https://ssrn.com/abstract=3048104
Download the paper and read it!
James L. Salmon, Esq.
300 Pike Street
Cincinnati, Ohio 45202
JamesLSalmon @ gmail dot com
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