(This article first appeared in Triangle Business Journal on March 1, 2018)
March is basketball month.
Some basketball players are gentlemen – handshakes for opposing teams. Other players trash talk opponents.
But, what if referees started trash talking players?
Currently, the SEC is full court pressing Blockchain/Coins entrepreneurs off the court by shutting down their ability to raise money through Initial Coin Offerings (ICOs).
Is the SEC acting like a player or a referee?
The issue is: are Coins/Tokens securities?
The analysis involves legal principles the Supreme Court announced in SEC v Howey that selling land with service contracts was a type of security called an “investment contract.” The Howey test is “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.”
Condo hotels often involve investment contract issues. Sometimes condos that are real estate are also securities and sometimes they aren’t. Specific facts matter, including the sales pitch and provisions of rental pool contracts under which hotels share revenue with condo owners.
Condo hotels are the gentlemanly side of the SEC. The SEC gives guidance about specific facts and does not try to kill the entire Condo hotel industry.
Contrast this with the SEC trash talking Initial Coin Offerings.
Rightly, the SEC reminds people the Howey test governs and is taking action against some ICO sponsors for fraud. That’s normal. Commit fraud and you should face consequences.
But the SEC’s Chairman is trying to shut down the every form of ICO. According to the SEC’s Chairman, all Coins/Tokens are securities under the Howey test.
Beyond that, the SEC’s Chairman is threatening to sanction law firms that disagree with the SEC’s ICO dictates. According to the SEC’s Chairman, all lawyers who think there is room for debate are abetting fraud. By doing so, the SEC is giving up its role as referee and is getting down and dirty like a player in a street pickup game.
Who’s the target of SEC wrath?
Lawyers advising clients to fully disclose risks to investors when they sell securities called SAFTs, but who also advise that Tokens later issued to SAFT holders are not securities because Tokens are used to buy products and services – like discount coupons.
If you invest in a business that operates gold mines, you are buying securities and should make disclosures to investors. But SAFT lawyers think if the business gives owners gold nugget dividends, the gold is not a security. Maybe that’s a winning argument, maybe not. There is room for disagreement.
Who suffers if gold/Tokens are not securities? Investment bankers will make less money reselling securities if Tokens are not securities. Is the SEC protecting investment bankers at the expense of investors? Why? What good are currencies if you have to pay investment bankers to let you buy things with them?
Why does this matter?
Coins/Tokens are vital elements of blockchain technology. Declaring war on blockchain financing means America will fall farther behind the world in implementing this important technology. Unlike other countries, America’s small tech companies lead the way in innovation. We can’t rely on giant companies to lead.
We need impartial referees who call fouls when players break disclosure rules, not referees who try to stop the game by trash-talking the lawyers for one team.
The SEC should prosecute fraud. The courts (not the SEC) will decide what are and aren’t securities.