One of the four requirements of the Howey test to determine if an investment is a security is whether an investor’s expectation of profit stems from the efforts of others.
The efforts of others must be “undeniably significant ones." Efforts that merely "contribute" may not be sufficient for a finding that the investment is a security.
The efforts must be "managerial" and affect the success or failure of the investment.
A mere increase in value on a secondary market is not sufficient to be considered an increase from the efforts of others.
One of the four requirements of the Howey test to determine if an investment is a security is whether the investment is a “common enterprise.” However how courts define “common enterprise” can vary.
A majority of courts apply the horizontal commonality test. Under this approach, a “common enterprise” exists if multiple investors combine their assets and share the risks and profits of an investment. This is the broadest interpretation of “common enterprise.”
Vertical Commonality: Broad
Broad vertical commonality exists where investors’ profits/losses are only related to the efforts of the promotor or issuer.
Vertical Commonality: Narrow
Narrow vertical commonality exists where investors’ profits/losses are tied to the actual profits/losses of the promotor or issuer of the investment. This is the narrowest interpretation of “common enterprise.”
As we enter the age where Blockchain Rules The Nation, the Securities and Exchange Commission (SEC) has said it will treat Initial Coin Offerings ("ICOs") on a case-by-case basis.
In light of this uncertainty, some token issuers may choose to ignore securities laws and hope to Get Lucky when they get pre-ICO investments. But the SEC is likely to increase its scrutiny of tokens, so you should probably try Doin' It Right and use a Simple Agreement for Future Tokens ("SAFT").
Background: what is a security is and why does it matter? Read this (spoiler alert: more investments are considered securities than you probably think).
Harder, Better, SAFTer, Stronger: What Is A SAFT?
SAFTs are modeled after Y Combinator’s Simple Agreement for Future Equity ("SAFE"). A SAFT is an agreement between a utility token issuer and a token purchaser, and is often accompanied by an offering memorandum (which is a standard document used for marketing for VC and hedge fund offerings).
In traditional and crypto venture capital funds and hedge funds, many private securities investments are restricted to “accredited investors." This is done to avoid SEC registration via Regulation D ("Reg D"), for example.
But what does "accredited investor" mean?
“Oh Good, Public Scrutiny”: Why Coinbase’s Insider Trading Fiasco Matters For Different Reasons Than You Think
GDAX and Coinbase recently added Bitcoin Cash to their rosters. In the wake of this addition, some signs suggest insiders at Coinbase may have engaged in insider trading shortly beforehand.
Following the addition, Coinbase tweeted this:
Bitcoin futures are here (…they’re just not evenly distributed).
The SEC's approval of Bitcoin futures markets is a significant step on the road to the creation of a new asset class. It will likely open the door for more Bitcoin derivatives and other crypto futures, further institutionalizing Bitcoin’s legitimacy and stimulating adoption.
Which means all eyes are now on ETFs.
Bitcoin often gets denigrated for consuming to much electricity.
But what is the aggregate energy consumption of physical banks, ATMs, bank servers, and so on?
Way, way more than Bitcoin and the entire crypto industry...
A handful of cryptocurrencies argue they will rightfully replace BTC as “the” currency, like Litecoin, Bitcoin Cash and Dash.
They claim they’re better due to faster blocks or less centralize-able mining.
But none of that likely matters in the long run.
In response to the Security and Exchange Commission’s (SEC) statement this week, the Chairman of the Commodity Futures Trading Commission (CFTC) released his own.
Background: the CFTC regulates most commodities, options, futures, derivatives and swaps. The CFTC has determined that cryptocurrencies are commodities, and thus are something the CFTC can regulate. And now that we're getting Bitcoin futures markets, crypto will fall under the CFTC's jurisdiction even more.
Today, the Chairman of the Securities and Exchange Commission, Jay Clayton, released a strongly worded statement on cryptocurrencies.
He made this bold observation:
“By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions . . . .”
“omg the SEC just called cryptocurrency a security and is bringing down the Big Brother hammer.”
Not really, no.