First, I'd like to state that this post was created to start a discussion. I want to hear the opinions of the community and open a discussion on moving forward with legal compliance in the event of SEC regulations being established. Hearing from individuals that have gone through the ICO process would help immensely in building a knowledge base surrounding these topics and allowing startups to more confidently build a business on the Ethereum platform.
The topic surrounding ICOs and token offerings has stirred legal questioning here in the United States. There seem to be two very different opinions and categories that people fall into.
Let us cut to the core of the discussion:
Is a Token a security?
This is arguably the question that divides individuals into their respected stance on the matter. Many legal professionals in the USA have been warning for months that although there is no SEC regulation now, the future will be very different and US based companies and citizens will have to be compliant with SEC regulations. They classify tokens as securities on the basis that many investors are contributing monetary instruments in exchange for expected future profits. They then bring up "The Howey Test" which is a method for determining if a transaction is considered an "investment contract". If so, then under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and therefore subject to certain disclosure and registration requirements.
Under the Howey Test, a transaction is considered an "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
The opposite side of the argument would argue that tokens are not securities and the transactions are not an investment contract. Now, certain companies that are currently operating in the cryptocurrency space have undoubtedly found loopholes to get around these requirements.
I guess the first argument for the opposition would be to address #1 of the Howey Test:
Is Ethereum, Bitcoin, or another altcoin used for the funding of a token sale considered "Money"?
This is an extremely complex question to answer. For most of us, in our gut, the resounding answer would be yes, however I believe these digital assets are much more then that. Especially cryptocurrencies that are conducting smart contract transactions. An argument against the term "Money" would be their very digital makeup. There have been previous court rulings that have stated bitcoin is in fact "money" and there have been other rulings that have stated bitcoin is "software". This question is completely open for discussion very vital to passing the Howey Test.
A second argument for the opposition would be that token holders are active partners contributing to the success of the company. If this was proven true then it would negate the rulings that token transactions are "investment contracts" and each token buyer is critical to the operation of the business because it's in there best interest.
Our regulations here in the United States are not always fair especially in regards to rulings surrounding "accredited investors" or individuals that have $1 million dollars net worth, excluding their homes. Blockchain Capital took advantage of this law for their token sale only being open to members of this category. Personally its a fucked up regulation that the SEC imposed and it limits the people from making free investment decisions. Blockchain was smart to take this route as it makes them exempt from having to register coins or tokens as securities under SEC regulations.
I'm not a lawyer and I'm not an expert by any means in security law. I created this space to open the discussion to public opinion and hopefully some experts of their respected fields chime in so we can move forward with our startup and investment strategies here in the US.