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Can a Crypto-token Crowdsales Be Classified As Securty


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Yes, Crypto-token Crowdsales Can Be Classified As Securities. Here’s Why:




The seminal test for determining whether a particular instrument is an “investment contract” (and thus considered a security under the ‘33 Act) is the Howey Test.  

What in the wild wild world of sports is the Howey Test?

Way back in 1946, the W.J. Howey Co. was offering the sale of small tracts of land where purchasers could lease the land (via a service contract), back to Howey, who would then keep the purchasers’ land looking majestic AF.  Individual purchasers of these tracts had no right of entry or any right to market the crop, but were promised a share of the profits of the citrus fruits grown on the land.   

Now this little scheme was going great for good ole W.J. even though some folks did not take W.J. up on his offer to service their property. That is, until the SEC stepped in and effectively said, “Slow yo motherfuckin’ roll fella. You can’t just go around selling investment contracts (securities!) without checking with us first” (registering said securities). The SEC brought an action to enjoin the sale of citrus grove interests but had a problem because the interests in question did not constitute any of the specific, traditionally enumerated securities listed in the definition above. So the SEC got a little creative. They argued that the citrus fruit interests were investment contracts which had yet to be defined by Congress. The Justices of the Supreme Court, being the Wise Gs that they were, determined that in the instances where the instrument is novel, they will always disregard the form of a transaction and instead focus on the economic reality of the transaction  

If the form of a transaction is inconsequential, what constitutes an investment contract?

SCOTUS explained that an investment contract requires:

  1. The investment of money (or anything of value);
  2. In a common enterprise (Some courts require vertical³ and horizontal commonality⁴);
  3. Where investors are led to expect profit$;
  4. Solely (which later was held to mean predominantly⁵) from the efforts of others.  



The ethos behind the ‘33 Act was to protect consumers from “betting the farm” on risky, unproven businesses. The disruption of financial markets and traditional fundraising mechanisms via distributed ledger technology opens the door for non-accredited investors to make incredibly risky and speculative investments.  These are exactly the types of ventures that the ’33 Act attempts to regulate. 

Edited by MundoXRP
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On 8/16/2016 at 8:04 PM, MundoXRP said:

they will always disregard the form of a transaction and instead focus on the economic reality of the transaction

It quacks like a duck!

This is very similar to how the IRS operates as well - they look at the essence of a transaction, and typically don't allow individuals to throw up red-tape excuses for why something shouldn't be taxed. 

Always err on the side of "what I'm doing is probably regulate-able and taxable."

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