Earlier quoted context omitted.
The definition of "security" is pretty objective (Howey test), but the answer it produces tends not to be liked by people in the crypto space, so they argue hard about why it's not a definition of security. What quotes like these do is make it trivial to prove the mens rea (intent) requirements, and put a lie to claims that they didn't know it was a security or that their interpretation as not-a-security was reasonab…
Putting this here in case it's useful. Please correct if it's wrong. What is the Howey test for whether something is a security? """ The Howey Test asks whether a transaction constitutes an "investment contract," which is a type of security. If it is an investment contract, it must satisfy four criteria: It is an investment of money. The investment is in a common enterprise. There is an expectation of profits from th…
Speaking to various security lawyers there were two terms that are extremely vague in the industry:
1) "Common enterprise". What does that mean? Gary Gensler openly said in a speech Bitcoin isnt a security because there is no "common enterprise." When he was saying these words he made a motion with his elbows like you've got a buddy. That's the closest I got into his mind for what "common enterprise" means. But really, if you go by the widest definitions, "common enterprise" means anything where various entities are all united in winning, e.g. miners mine, people buy and hold, it's all a common enterprise. By that definition, almost everything is a security, including Bitcoin, despite what even a hawk like Gary Gensler says.
2) "Equity securities". As opposed to non-equity securities such as debt. Let's say all tokens are securities. But are they "equity securities" meaning you have to register with the SEC as soon as you have more than 2000 holders? But what makes a security an "equity security" specifically? Is it the ability to vote? Then governance tokens are "equity securities". Is it the ability to receive dividends from some profits? Then maybe Liquidity Pool tokens on Uniswap are equity securities.
But nevermind that these terms are not well defined, even in the statutory law or case law. The vagueness is actually broader than that.
All shows like Yu Gi Oh, Pokemon, etc. have been running, technically speaking, unregistered securities offerings throughout the world and United States, yet the SEC does nothing. They are textbook cases of the Howey Test:
1) People (kids, in fact!) buy Yu Gi Oh trading cards
2) There is an investment of money (either they nag their parents, or they actually spend a non-trivial proportion of their own life savings)
3) With an expectation of profit. Witness how many of them don't actually use the cards, but keep them in mint condition (and as we have seen SEC successfully argue in the recent case SEC vs LBRY, if even a few people buy with expectation of profit, then ALL those sales are securities).
4) From the efforts of others -- namely the producers of the show, and their promotion of Yu Gi Oh trading cards. Trading! Perhaps even selling!
5) There is definitely a common enterprise, that isn't even decentralized. The Yu Gi Oh show is produced in Japan and shown in the USA, and drives the sales of the cards. Cancel the show, and the cards fall in price. Yu Gi Oh Abridged series even lampooned this, to great comedic effect.
Oh those foreign-owned Japanese companies, preying on our kids selling them investment contracts! Do they really think the kids are sophisticated investors who think things through when they keep their mint-condition cards! Who will buy the top and be holding the bag after the show is canceled?
So being a textbook definition of Howey, why did the SEC never go after Pokemon, Yu Gi Oh and any of the other "merchandising" companies? How about Marvel with their mint-condition comics? Isn't that a "common enterprise" since some people buy comics for their investment value?
But vagueness actually broader than that. According to some experts, everything is a security: https://www.linkedin.com/pulse/everything-security-chris-har...
This article was shared on HN at some point, and it shows how the SEC has at times considered even transactions outside the united states, which did not have any character you'd normally associate a security, a security transaction in the USA. So at this point it starts bordering on the absurd.
If you take Objectivism to its logical conclusion, it could seem that it's morally better to torture a man for a $100 profit, as long as you could get away with it. But then Ayn Rand throws in "as befits a rational being", as a sort of no true scotsman argument that avoids the logical conclusion.
Similarly the SEC has been using "Sufficiently Decentralized" as a way to avoid the logical conclusion that they should go after a ton of other large ecosystems. For example, Hinman famously did it with Ethereum: https://www.sec.gov/news/speech/speech-hinman-061418
But now after he left, the SEC is revisiting that: https://decrypt.co/46456/regulator-coined-term-sufficiently-...
Today, Gensler says Bitcoin is not a security. Tomorrow, it could be considered one.
But wait, it gets worse.
Let's remember that the STATES also have their own definition of a security. In fact, the states on the West Coast (from Washington to California) consider anything a security that puts capital at risk. Yes, that's right, even if it doesn't meet the Howey test, as long as you have put your capital at risk, it's a security transaction! You don't need an expectation of profit. Wow!
https://www.theselc.org/which_states_apply_the_risk_capital_...
I have asked securities lawyers and they have confirmed that MOST KICKSTARTER CAMPAIGNS ARE TECHNICALLY SECURITIES SALES according to these state laws, they just don't enforce it.
Many of you live in California, so all of you who have done kickstarter campaigns have probably violated your own state's securities laws. But it's so absurd that they haven't bothered enforcing those.
About the only things that aren't at securities transactions, by the way, are donations. That's when people simply send money with no expectation in return. Hex tried to leverage that with their "sacrifices".
Think you can just airdrop coins to people? There's no "investment of money" right? Well, using human logic that would be correct. But there have been some precedent back in the 90s when people showed up to drink beer, put their contact info and got free stock, or something like that. And the SEC said that even that was a security, presumably because the contact info was worth something, or maybe some other reason, it's not actually spelled out clearly in the case law. So now, although there has never been a single SEC case going after an airdrop, lawyers are cautious.
Yes they laws are protecting you from getting free stuff in your wallet! Who knows kind of loss you can incur by getting free stuff with no obligation!
Anyway, of course there are important scams to go after and the SEC has a job to do. I think it's an important job. But I'm just showing you how absurd the thing can get if you try to use actual definitions of words in the Howey Test and take it to their logical conclusion, and what it actually means.
This isn't limited to Securities laws. Remember the Infrastructure Bill? Well, it said that a "broker" is anyone who builds software. Now if you build a wallet, you might have to KYC all your users. Except the Treasury said they won't enforce it. How nice (what about under the next admin?) Well, the Bitcoin lobby got them to exempt Bitcoin through an amendment around proof-of-work, but that's pretty much it.
Oh and Europe is about to pass the Cyber Resilience Act that might create penalties for any open source software that doesn't pass a check by their cyber security watchdog agencies, which haven't been created yet for this bill.
I'll just finish with a couple words about FINCEN, because OFAC and FINCEN are far more serious than the SEC. (And FATCA also enforces things like the Travel Rule worldwide, and soon the Travel Rule will require everyone to track everything).
You know all of you who build marketplaces and handle money? Well, you might be a MONEY TRANSMITTER. According to the Bank Secrecy Act, you have to register and then the States will slap you with a lot of requirements, like maintaining a surety bond. But, there are exemptions, I'll let you read about them here:
https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20...
Here's the interesting thing. These are only exemptions on the FEDERAL level. The individual states might have a DIFFERENT definition of "money transmission business" and they might apply their own local laws to you. It might be that two sided marketplace you're building, it's violating money transmission laws in a dozen states. Maybe. I've asked lawyers for a list, and very few actually have them.
But here is a useful link, enjoy: https://abnk.assembly.ca.gov/sites/abnk.assembly.ca.gov/file...
Alright entrepreneurs, good luck navigating that!