35 comments

  • iMuzz 2298 days ago
    > I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.

    > We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike. I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so.

    I don't know much about Jay Clayton (SEC Chairmain) but he seems to be taking a very pragmatic stance on tokens. From what I gather, he's saying that some of these tokens should be classified as securities, while others should not. And we as investors should be be diligent to probe the creators to see if these tokens are subject to regulation and are legal.

    This is amazing! The SEC haven't quite stepped in yet. But I fully expect them to. And this gives some great insight into what we can expect in the future.

    • modeless 2298 days ago
      I think this is more negative for ICOs than your quotes imply. Look at this:

      > 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 of our federal securities laws.

      Basically, almost all ICOs so far are illegal. He says that it's possible to make an ICO that isn't illegal by following SEC rules, but I would be surprised if a single existing ICO actually qualified because most of the benefit of doing an ICO comes from not complying with the regulations.

      • zemo 2298 days ago
        > almost all ICOs so far are illegal.

        a lot of them are offering to sell you an asset that they advertise as being sure to appreciate, with the subtext that you will sell the asset at a later point for a gain. Selling something purely to be a store of value and appreciation is basically the textbook definition of a security, isn't it?

        • jessriedel 2298 days ago
          No, your definition is based on the textbook definition of speculation, i.e., that the owner values the thing not because of its intrinsic value to him but only insofar as he can sell it to someone else later. As Kadin points out, the actual definition of a security is (basically) a claim on property or future profits, which is logically distinct.

          A tulip can be speculative, but it's not a security. A non-transferable share of stock is a security but it's not speculative.

          • Jd 2298 days ago
            The textbook definition of a security is expecting to profit based on the efforts of a third party.
            • jessriedel 2298 days ago
              The definition in Kadin's comment that I reference is more exact.
            • runeks 2297 days ago
              With what money will you buy the security unless you, yourself, have exerted an effort? You’re profiting from the money you’ve earned through exerting an effort, followed by foregoing consumption, resulting in surplus capital with which you can purchase the security.
        • bufferoverflow 2298 days ago
          How many ICOs "advertise as being sure to appreciate"? I've looked at like 40 different ones, bought into none, but none of them promised any return on investment. That's some straw man argument.
          • ianamartin 2298 days ago
            All of them. The more coins have been mined, the fewer are left to mine and the harder they are to mine.

            It's guaranteed scarcity. By design. All you have to add to that formula is the idea that there's a demand. And that's what every ICO is: hype about demand for a decreasingly available thing.

            Once you have been sold that there's a demand, the appreciation is guaranteed by definition of what it is.

            • eudoxus 2298 days ago
              Seeing as most ICO are ERC20 tokens on the Ethereum chain you are most certainly incorrect about your deflationary theory implying appreciation. Since most ERC20 tokens are 100% premined and sold during the ICO, there is no concept of "mining" with those ICOs (except maybe Minereum :p ).

              Please avoid making generalized statements, especially ones that are flat out wrong.

              • dkersten 2298 days ago
                If they’re “pre-mined” then surely there is already a preset limited amount of tokens?
                • fidrelity 2298 days ago
                  wouldn't that apply to every trading card and collectible item then?
                  • dkersten 2298 days ago
                    Usually the companies that make trading cards can also print more.
                  • tomkarlo 2298 days ago
                    Not generally, because there's no promise of any future utility or increase in demand, at least by the manufacturer. People buy them because they hope they'll appreciate in value, but that just makes them the subject of speculation, not a security.
                • xorcist 2298 days ago
                  There are, but many of the ICOs are controlled by a company that reserve the right to change the contract at any time.
                  • gomox 2298 days ago
                    Can you point to a specific ICO where the token contract allows for additional token issuance? The ERC20 reference code does not include functionality for this, nor for replacing the token code at a later date.
          • drumdance 2294 days ago
            They don't advertise that because their lawyers told them not to. There are lots of ways to dance around this and imply appreciation without stating it.
        • Kadin 2298 days ago
          This is the (literal) textbook definition of a security:

              any note, stock, treasury stock, security future, bond, debenture,
              evidence of indebtedness, certificate of interest or participation in
              any profit-sharing agreement, collateral-trust certificate,
              preorganization certificate or subscription, transferable share,
              investment contract, voting-trust certificate, certificate of deposit
              for a security, fractional undivided interest in oil, gas, or other
              mineral rights, any put, call, straddle, option, or privilege on any
              security (including a certificate of deposit) or on any group or index
              of securities (including any interest therein or based on the value
              thereof), or any put, call, straddle, option, or privilege entered into
              on a national securities exchange relating to foreign currency, or, in
              general, any interest or instrument commonly known as a “security,” or
              any certificate of interest or participation in, temporary or interim
              certificate for, receipt for, guarantee of, or warrant or right to
              subscribe to or purchase, any of the foregoing. [1]
          
          It's a somewhat circular definition, but my reading is that basically, anything whatsoever that gives you an ownership interest or claim on the future profits of an enterprise can be construed as a security. You can track who owns the shares of the enterprise via entries in a central ledger (the current method for most stock companies), use paper bearer certificates (traditional way), use a distributed ledger, hand out carved pieces of pottery, whatever. If it functions even remotely like a security, it's probably a security.

          EDIT: The Supreme Court's "Howey Test" [2], which came out of a 1946 case over complex real-estate leaseback deals, is in some respects a simpler method to determine whether something may be a investment contract, which is a security:

            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 Howey Test is reliable in the sense that anything satisfying those four points is extremely likely to be an investment contract and thus a security, but I believe there are probably securities that fail one or more aspects of the test but are still regulated, due to the broad statutory definition of "security" under the 1934 and 1940 Acts.

          [1] That's from the Investment Company Act of 1940, which seems to be definitional; there are some other definitions used elsewhere in the UCC and other Federal laws (largely from 1934), but they seem to be similar, and quite a few places punt to this definition. (Quoted in http://apps.americanbar.org/buslaw/newsletter/0014/materials... which is an annoyingly "locked" PDF that you will need to de-DRM; this is left as an exercise to the reader.)

          [2] http://consumer.findlaw.com/securities-law/what-is-the-howey...

          • Jd 2298 days ago
            Here's the earliest legal work on this stuff which will probably interest you:

            https://coincenter.org/entry/reporting-back-from-the-blockch...

          • sillysaurus3 2298 days ago
            Mobile friendly. (Mostly because I'm on mobile and no way am I going to swipe back and forth 40 times to read this):

            any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. [1]

          • elmar 2298 days ago
            > 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

            ------------

            Using the "Howey Test" on Bitcoin you find that Bitcoin and almost all other cryptocurrencies should be considered securities.

              1. It is an investment of money 
            yes, electricity and hardware are equivalent to money

              2. There is an expectation of profits from the investment  
            yes

              3. The investment of money is in a common enterprise   
            yes

              4. Any profit comes from the efforts of a promoter or third party.
            
            yes, from Satoshi the original promoter and all subsequent miners.
            • randomsearch 2297 days ago
              Fails on (2). The only reason you expect to profit is you think (without rationale) that the value of the coins will increase. That’s pure speculation.
            • Frogolocalypse 2298 days ago
              You fail on number one I'm afraid, and go down from there. 1. By that rationale, buying baseball cards is buying a security. Maybe if you were the ISSUER of the cards, you'd have a point. But even then, it's tenuous. Maybe if they were selling pre-release cards? 2. So baseball card buyers are buying securities? 3. Where is this supposed bitcoin enterprise? 4. Where can I buy these coins from satoshi?
          • elmar 2298 days ago
            Using the "Howey Test" even CryptoKitties should be regulated by the SEC!
            • freeone3000 2298 days ago
              The IRS considers them securities for capital gains. I'd be surprised if the SEC saw it differently.
        • complexmango 2296 days ago
          Forget about technical definitions for a second, and consider a practical view from a businessperson.

          A share of stock in a publicly traded company is a legally recognized right to the earnings/assets of the company. Of course, the company may choose to distribute the earnings, or reinvest them for greater future earnings/assets. However, all ICOs I've seen so far bestow no legal right to $$ denominated earnings/assets of any sort.

          So an ICO to purchase a cashflowing asset (e.g. an apartment building) gives the owner of the token ZERO legal right to claim any of the cash from the rent collected or proceeds from a sale of the apartment building. However, the owners of stock in the corporation that purchased the building definitely have legal rights to the cashflow/proceeds from sale etc, even if their purchase was facilitated by the sale of virtual tokens. They have no legal obligation to pay the token holders anything whatsoever.

          This is an over-simplified example to drive the point home.

      • phaed 2298 days ago
        > Basically, almost all ICOs so far are illegal.

        They are only illegal in the US if they allow US citizens to participate, and the majority ban US citizens. So I think you have it backward.

        • eximius 2298 days ago
          Legally speaking, are they on the hook if they merely say that and don't take preventative measures against US citizens? It could come back to haunt them if they ever want to expand to the US down the road and didn't take precautions.
          • londons_explore 2298 days ago
            A simple dropdown saying "citizenship" and then turning red with an error message saying "United States is not allowed. Did you mean United Kingdom instead?" will encourage most people to put something else.

            Then the company can fairly legitimately say "The customer lied to us about their citizenship. We took all reasonable measures to determine their citizenship, because there isn't a freely available database of which people have which citizenships"

            • tfha 2298 days ago
              My understanding is that the SEC expects you to require proof of an alternate citizenship via a passport. Simply having a drop-down that users can lie about by clicking a box or using a VPN is not good enough.
          • AlexCoventry 2298 days ago
            Yes, they are on the hook in that case. (Not lawyer, not legal advice.)
        • AlexCoventry 2298 days ago
          Unless they're using expensive KYC procedures, I doubt that many ICOs have done enough to exclude US investors that the law will excuse them from SEC regulations.
          • Kiro 2298 days ago
            Why would I care what the SEC thinks if I'm outside the US?
            • beagle3 2298 days ago
              Because of FATCA and friends, essentially all financial institutions in the world now report to the US and follow its rules. If you are not a US taxpayer, and outside the US, they don't directly apply to you, but they have already affected the regulations that do apply to you.
              • noway421 2298 days ago
                This is literally why we need crypto
                • ckastner 2298 days ago
                  Funnily enough, I drew the opposite conclusion from grandparent's comment: To me, this is literally why the I'm-beyond-government-control crypto dream cannot work.
            • killjoywashere 2298 days ago
              You should be aware that the decision of jurisdiction can pull you into courts you never knew existed, in jurisdictions you wouldn't imagine could exist. Finding a country that won't extradite you may become an issue of treaty, or even a string of treaties. IANAL, but I sat in on one of my brother's international law classes, which quickly convinced me to not fuck around in that arena. Lawyer up early.
            • ars 2298 days ago
              Most countries have securities laws, not just the US.

              Are you sure your country doesn't?

              • scotty79 2298 days ago
                Most countries define security as either equity or fixed income instrument and that's all. Nothing of the US "maybe it is, maybe it isn't ... is there expectatiom of profits? ... so maybe it is or it isn't"

                My country has a list of things that are securities written into the law. Until they write in there crypto tokens they are not securities.

          • sah2ed 2298 days ago
            Filecoin's ICO seems to be one of the few exceptions to follow securities law.

            https://www.cryptocoinsnews.com/filecoin-ico-raises-record-2...

            • Alex3917 2298 days ago
              > Filecoin's ICO seems to be one of the few exceptions to follow securities law.

              The SEC commissioner said that no ICO has registered as a security so far. Given that Filecoin was one of the only ICOs to openly advertise themselves as being a security, it seems like they could be in even more legal trouble than everyone else.

              • tfha 2298 days ago
                They filed a Reg D exemption, which is different from a registration, but allows you to legally offer securities if you comply with a narrow set of restrictions.
          • phaed 2297 days ago
            KYC is not expensive when you're raising millions. Most do them.
        • htormey 2298 days ago
          Here’s a question. I’m a permanent resident (green card holder) who lives in the USA. Is it legal for me to invest in ICOs?
      • ikeboy 2298 days ago
        Most of the benefit of doing an ICO is that investors are throwing a ton of dumb money into ICOs.
        • modeless 2298 days ago
          Exactly. And SEC regulations are designed to stop dumb money from going into risky investments. If you comply then you can't cash in on that dumb money and there's no point to doing an ICO.
          • ikeboy 2298 days ago
            A lot of that dumb money is being put in by wall street, so not sure you're right.
            • modeless 2298 days ago
              This is not my impression. It seems to me that the dumb money is people who made early fortunes in crypto or regular people looking to ride the next pump and dump. If Wall Street money is coming in it's mostly to take advantage of the dumb money for a quick profit, for example by getting preferential pricing or timing so they can sell to later investors).
              • ikeboy 2298 days ago
                I think most of the money that's going in is by people with more than the 250k limit. Above that you can market pretty much anything as long as you're honest, I think. So I don't think it would be affected much, except that ordinary users wouldn't be able to use it (unless they could get it on exchanges, which may be under different laws?)

                Not a simple question, I guess.

                • dweekly 2298 days ago
                  What's the 250k limit? (If you're speaking of Accredited Investors, the limit is $1m in net worth not including primary residence.)
                  • arkem 2298 days ago
                    Maybe they're referring to the 200k income threshold for the other accredited investor test?
                    • ikeboy 2298 days ago
                      Yes, that. Remembered wrong.
              • username223 2298 days ago
                > If Wall Street money is coming in it's mostly to take advantage of the dumb money for a quick profit,...

                Examples? Is Goldman playing in the current bubble?

          • mrschwabe 2298 days ago
            Is dumb money also considered money that is going towards free speech activists?

            Why do you think the SEC should be arbitrators of what and what is not dumb money?

      • api 2298 days ago
        There is a second benefit.

        Right now the crypto space is like the entry point of an MMORPG. Picture a bunch of dollars entering and then walking around and trying things. "What do I do here?" "How do I play?"

        Obviously it's bubbly but that's not the point. The point is that all this new money entering the crypto space is looking for something to do.

        Putting out an ICO will attract some of it. It is not accessible in any other way.

        ... and unfortunately ICOs and crypto have sucked a lot of the air out of conventional crowdfunding, equity crowdfunding, and small time angel investing. So crypto is where the money is and you have to go crypto to reach it.

        It's dumb but markets are not rational.

    • everdev 2298 days ago
      Important second line to that quote:

      "A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed"

      They're saying it's fantastic, just do it legally. And for any offering that passes the Howey Test, that means registering with the SEC.

      • couchdive 2298 days ago
        and probably requiring Accredited Investors only at some point, which probably 90 percent of crypto folks aren't, myself included.

        Accredited investors must make 200 to 300k annual (dual income allowed) and/or have 5 mill in tied up assets and/or a net worth of over 1 mill.

        • dahdum 2298 days ago
          It's just the income or $1M net worth excluding primary residence. The $5M is for business entities.
          • couchdive 2298 days ago
            thanks for the more detailed and accurate info!
        • AnkhMorporkian 2298 days ago
          90 percent? Probably close to 99. While a significant portion of crypto is probably owned by rich people, the vast majority of actual owners of crypto is owned by people who make far less than that.

          For every millionaire out there who is investing in crypto, there are a few hundred people who just want to buy things off the dark web.

    • charlesdm 2298 days ago
      They seem to be approaching things in quite a pragmatic way, which is great.

      This is a space that will grow in the coming years, and while there will be growing pains / abuses along the way, this might end up being a new, valid and accepted method of raising international funding.

      All the actors just need to get comfortable with this and figure out the best way to approach this.

    • wmf 2298 days ago
      he's saying that some of these tokens should be classified as securities, while others should not.

      Gotta love the unlimited supply of optimism in the cryptocurrency world. Every single existing token is either a security or a commodity, but people still think they can squeeze through the "utility token" loophole.

      • iMuzz 2298 days ago
        > Every single existing token is either a security or a commodity

        My optimism could totally be misplaced! But here's an excerpt from the SEC statement that seems to go beyond your "security or commodity" classification.

        > A key question for all ICO market participants: “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.

        • wmf 2298 days ago
          But no actual tokens work that way because no one would get rich off them.
          • maneesh 2298 days ago
            Volts work that way. Earn crypto for doing healthy habits. Use it to unlock new apps and courses for behavior change.

            It becomes a lot easier when you realize money isn't real, it's a constraint. Like oxygen, it only matters when you don't have it --- once you do, it becomes irrelevant -- a story that allows you to represent incentives to do positive deeds.

            https://pavlok.com/volts

            • wmf 2298 days ago
              And you're the founder/CEO; what a coincidence!
    • Alex3917 2298 days ago
      > he's saying that some of these tokens should be classified as securities

      If by 'some' you mean that some future tokens might be able to be offered for sale legally, then yes. But he also just declared basically 100% existing token operations to be criminal.

      • Frogolocalypse 2298 days ago
        Not 100%, but a lot, for sure. I definitely read it as most.
    • notyourday 2298 days ago
      > This is amazing! The SEC haven't quite stepped in yet. But I fully expect them to. And this gives some great insight into what we can expect in the future

      In my view, the biggest issue that we currently have is that SEC is not going after attorneys and accountants who are facilitating these schemes. Do note that I'm not talking about a company performing ICO hiring a law firm to do it correctly, crossing the Ts and dotting the Is. What I'm talking is SchmoeCo going to a law firm specializing in ICOs ( sidebar: can you even believe that there are now law firms that specialize in ICOs?! ) basically disclosing that their ICO is a gigantic fraud scheme and those law firms and accountants help them to pull off this scheme, often for a percentage of the money raised.

      Going after those firms will relegate the ICO scams and frauds to the pink sheet pump and dump scheme level while letting the legitimate companies to use ICOs to raise money for legitimate even if very speculative projects.

    • fergie 2298 days ago
      If nothing else, the current bitcoin adventure is raising a general awareness of the nature of currency- that is, something that primary exists to be means of exchange, and not something that primarily exists to store value.

      It seems obvious that ICOs should be treated as the sale of securities- its somewhat reassuring to see the SEC endorsing this view.

    • Frogolocalypse 2298 days ago
      I think that is a very considered and wide ranging statement. The proof is in the pudding though. He looks like he has called out some ICO's, but until enforcement proceedings start, it is still not clear. I can't see how any pre-mined ICO, like ripple, wouldn't be treated like a security given those statements.

      As a long time crypto investor, even i recognise that ico's are out of control. It is my opinion that if you can't mine it yourself, or get someone independent from the issuer to do it for you, it's a security in everything but name. Any presale token is simply a security towards the coins once released. I can't see how that isn't a security.

      • panarky 2298 days ago
        > if you can't mine it yourself, or get someone independent from the issuer to do it for you, it's a security

        That's not quite right.

        You could say that WoW Gold is "premined". You can't "mine" it yourself, and it's only issued by World of Warcraft.

        Same thing with Walmart gift cards and Disney Dollars.

        Call it money, or tokens, or scrip, but it's not a security.

        If you sell it to users primarialy to transact with it, it's probably not a security.

        If you sell it to fund the development of the enterprise, and buyers expect to profit from that enterprise, then it probably is a security.

        • Kadin 2298 days ago
          This is basically correct. If the thing you're buying gives you a claim on the future profits of an organization, it is probably a security under US law.

          If the thing you are buying has only its intrinsic value, then it is a commodity.

          An example would be a baseball card (intrinsic value only) vs. a card that entitled you to some fraction of that baseball player's future income over the course of their career. The latter isn't really something that exists, although it probably could, but if it existed it would probably be some type of security.

          • tomjakubowski 2297 days ago
            There's a company called Fantex that teamed up with pro athletes to do just that. https://en.wikipedia.org/wiki/Fantex
          • Frogolocalypse 2298 days ago
            > a card that entitled you to some fraction of that baseball player's future income

            I think i have an idea for a new ico....

            Call it : sportico!

            • luka-birsa 2298 days ago
              We're at a stage where if you have an idea for an ICO, it's probably already funded. This is a great example - SportICO already exists and it's called SportyFI - https://icomagazine.com/sportyfi/. Raised 5M USD during the ICO.
        • gt_ 2298 days ago
          If I’m understanding this correctly, a big difference is the potential for the value to fluctuate in relation to fiat. All of these examples are measured in denominations of US dollars. But, if these tokens are viewed as products rather than currency, therein lies another question. Is there a way to reach a conclusion on that?

          Maybe I am just being pedantic, but it seems most tokens could make an argument that they are products just by the fact that they build a brand and may have a technology that differentiates them from others. I have little hands-on financial experience but the terms of abstraction by which we define what a currency consists of seems like a philosophical topic to me. I am curious how this gets resolved.

          It seems cryptocurrency may offer the puzzle piece which illustrates this spectrum of abstraction to a degree which is truly painful. A year ago, I had no idea what a security is, and after reading about them for a year, I am doubting that they exist as a logically defined objective category. Like many things in finance, the concept of these securities appears to be a relative conjurement, dependent not on logical definitions but on contextual gaps of unimaginable forms of abstraction. As cryptocurrency implements the unimaginable, those gaps are filling. We will eventually face a continuum of abstraction limited to philosophies of material.

          I tried to read the linked release, got about 1/5 of the way down it and was just incredibly bored. I hate to sound so lazy and will try to read it again later.

      • lojack 2298 days ago
        I don’t understand why being premined makes any difference? A company could easily create an equity pool and a new mineable currency, and make that currency worth a proportional amount of equity. That would very clearly fall under the umbrella of security. Similarly someone could create a premined currency and evenly distribute it to anyone who asked for it, in exchange for nothing with no guarantees about it being redeemable for anything. That may not be considered a security.

        The lines become much more blurred when you’re talking about a staked currency where an ICO is necessary to help evenly distribute the coins which are then mined. Honestly, as annoying as this is, the definition is security is so broad that I find it hard to picture any cryptocurrency not being defined as a security.

        • derefr 2298 days ago
          If anyone can mine a thing for themselves (i.e. create more supply of it), then that thing is a commodity. (Gold, for example, is a commodity.) By definition, no one entity can really restrict the supply or trade of a commodity; and thus the government can't really make useful laws about what any one entity does with their holdings of a commodity.

          Any valuable thing that isn't a commodity, is a security. Every fiat currency is a security. Stocks and bonds are securities. Etc. The government can regulate securities (or rather, regulate their issuers, because there is a clear issuer), and so they do.

          The definition of security isn't really vague; it's just a definition of exclusion. Replace security with "non-commidty" whenever it comes up and things might be clearer.

          • sah2ed 2298 days ago
            Not disagreeing with your observation, but to extract gold, you need a mining license which is typically required by law, so in a way governments can still make useful laws that regulate the scarcity or abundance of gold as a commodity by pricing mining licenses accordingly.

            Gold ownership was outlawed in the US in 1933 by FDR.

            • moreless 2298 days ago
              > Gold ownership was outlawed in the US in 1933 by FDR.

              https://en.wikipedia.org/wiki/Executive_Order_6102

              EDIT: "The limitation on gold ownership in the U.S. was repealed after President Gerald Ford signed a bill to "permit United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad" with an act of Congress codified in Pub.L. 93–373,[19][20][21] which went into effect December 31, 1974."

          • YuriNiyazov 2298 days ago
            That's a very interesting way to distinguish the two, and the first time I am seeing it presented this way. Did you come up with this? Are there references?
          • Frogolocalypse 2298 days ago
            That's a really interesting insight. Thanks.
        • Alex3917 2298 days ago
          > I don’t understand why being premined makes any difference?

          The issue is when A) people buying the token are doing so because they expect the value to increase, and/or B) the value of the network comes from a central party or promoter rather than from the network participants. If a currency is pre-mined, then it's more likely to be a security because the network participants aren't helping to secure the network. Similarly, if the product doesn't yet exist, then it's more likely to be a security because the network participants are unlikely to be creating value.

          The fact that the token may be pre-mined or the product may not yet exist doesn't inherently matter except to the extent that they make it much more likely the token fails conditions A and B.

          Similarly, if Ethereum goes to proof-of-stake then it's more likely to be considered a security, but there isn't a specific law saying that proof-of-stake tokens are illegal.

        • stale2002 2298 days ago
          Well, it is not about pre-mining specifically that makes it a security.

          You could, for example clone Bitcoin exactly, but make a change where you recieve a billion free coins. It would be dumb, but that wouldn't be a security.

          The problem is when ICOs premine and sell you a token for something that doesn't already exist yet. The token represents a future promise, as opposed to something that exist right NOW.

        • jcoffland 2298 days ago
          Who's premining and then handing out all the premined tokens at random?
        • wbl 2298 days ago
          If you buy bitcoin you aren't buying it from the author of the bitcoin client to fund further development. I'm going to say not a security transaction.
          • ojr 2298 days ago
            the founder of bitcoin gave himself/herself a mining headstart with low difficulty, this can be seen as a founder reward
            • xorcist 2298 days ago
              Not only is that not true. The founder of Bitcoin even took the additional steps of proving in the genesis block that he did not give him/herself a headstart. In fact, even that block containing the proof itself was made inspendable on purpose.
              • ojr 2298 days ago
                did they make the first million bitcoins they mined unable to spend? No founder reward means no mining so it is very true, there was an advantage, the crytokitties creators are not allowed to breed kitties, but take a cut from every sale which is more fair
            • Frogolocalypse 2298 days ago
              What's funny in bitcoin, of course, is that none of those coins were sold, nor were they offered for sale.
  • mrb 2298 days ago
    This is not a statement from the SEC, but from chairman Clayton. See footnote [1]: «This statement is my own and does not reflect the views of any other Commissioner or the Commission. This statement is not, and should not be taken as, a definitive discussion of applicable law, all the relevant risks with respect to these products, or a statement of my position on any particular product.»
    • forgotmysn 2298 days ago
      ya it might be prudent to tweak the title
    • eternalban 2298 days ago
      Something about that bothers me. Even in this thread some are discussing this as "SEC says". In a way this is a 'pump' for cryptos and that [1] footnote could have been straight up front in the "Public Statement".
      • jessriedel 2298 days ago
        Part of what should bother us is that it signals that the law has become too vague to predict, so things are legal and illegal based on the inklings of the law enforcers. This means people are forced to read tea leaves in the enforcer's statements to determine what will be illegal in the future, rather than just reading an objective law on paper.
        • aeorgnoieang 2297 days ago
          > just reading an objective law on paper

          That, sadly, isn't usually possible either, unless you were implying that a lawyer or team of lawyers would be the person or persons doing the reading. Tho it's still better than being "forced to read tea leaves in the enforcer's statements".

    • runeks 2297 days ago
      So the chairman is using sec.gov as his personal blog? That doesn’t seem right...
    • ringaroundthetx 2298 days ago
      wait till you see how other commissioners vote alongside the chair
      • Frogolocalypse 2298 days ago
        Can't see any reason why they wouldn't. This seems all very straightforward. It looks like the advice is going out now to inform the market there are likely to be issues with many ICO's, and especially new ones.
  • seibelj 2298 days ago
    An incredible display of pragmatism from our regulators. Given the commentary on HN it seems that most here want everyone involved in an ICO to be thrown in jail. ICO’s are an effective way to raise funds from a global pool of enthusiasts. The Ethereum blockchain itself was funded from an ICO, and it’s doubtful that as much money would have been raised at such advantageous terms from traditional VC for a 22 year old kid like Vitalik. Very, very good news.
    • wmf 2298 days ago
      Yes, ignoring absolutely all regulations does tend to be advantageous.
    • chinathrow 2298 days ago
      > ICO’s are an effective way to raise funds from a global pool of enthusiasts.

      ... and fools and frauds during an intense phase of greatest hype, FOMO (fear of missing out), pump and dump etc.

    • RexetBlell 2298 days ago
      He was 19 around the time when Ethereum was raising money.
    • forapurpose 2298 days ago
      > it’s doubtful that as much money would have been raised at such advantageous terms from traditional VC for a 22 year old kid ...

      Why not? Isn't that the story of many wildly successful SV startups?

    • brucephillips 2298 days ago
      > ICO's are an effective way to raise funds from a global pool of enthusiasts.

      Once they're regulated as the securities they are, what advantage do ICO's have?

    • Kadin 2298 days ago
      > The Ethereum blockchain itself was funded from an ICO, and it’s doubtful that as much money would have been raised at such advantageous terms from traditional VC

      I'm not sure this argument is as strong as you seem to think it is.

      • ryanSrich 2298 days ago
        Considering Ethereum's market cap is currently 1/2 of a trillion dollars, I'd say it's a pretty strong argument...
        • dumbfounder 2297 days ago
          It's at $70B right now, which is about 1/14 of a trillion. All of crypto is about 1/2 a trillion though.
  • wyldfire 2298 days ago
    > Sample Questions for Investors Considering a Cryptocurrency or ICO Investment Opportunity

    What a great move by the SEC. I think Ethereum, as a vehicle for many/most ICOs, owes it to the community to embrace this list and create a standard disclosure form that encourages new ICOs to answer these. And if Ethereum offers an index of tokens somewhere (I'm not familiar w/Ethereum's details), it could indicate which ones answered some/all of the questions in the form.

    BTW industry/trade groups is how lots of businesses avoid regulation. Entertainment industry especially; e.g. ratings and content guidelines from MPAA/ESRB/Comic Code.

  • jashkenas 2298 days ago
    A little emphasis, focusing on the aftermath from the SEC's July report on the DAO:

    > "Following the issuance of the 21(a) Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security."

    • brianpgordon 2298 days ago
      He even flat out says that most of the ICOs he's seen should be considered securities:

      > 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 of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved. I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.

      I think some of the other commenters are glossing over that statement and being rather over-optimistic about the SEC's stance toward tolerating ICOs.

      • dahdum 2298 days ago
        They've been pretty clear in the past about the Howey test and ICOs running foul of it, so that part of his letter wasn't all that new. They're already taking action and should be - just today I saw an ad promising 60x returns on an internal market.

        I didn't expect to see him acknowledging the positives of cryptocurrency and the ICO funding model overall.

    • jackpeterfletch 2298 days ago
      I think people are viewing this as an attack on crypto, when its actually just common sense. People put too much faith the 'Contract' half of 'Ethereum/Smart Contract'

      Basically. Today ICOs are selling tokens as shares of equity in their company, or similar. Which you can then sell on.

      The problem is these companies essentially reserve the right to disregard that contract and could then sell their company, domestically or overseas, for cash, without recompensating any token holders.

      Securities regulation and law stops that. But the tokens do need to be lawful securities in order for the court to recognize them.

      Otherwise how can the court help you, and who else is going to help you?

      • westurner 2298 days ago
        > I think people are viewing this as an attack on crypto, when its actually just common sense.

        > […] The problem is these companies essentially reserve the right to disregard that contract and could then sell their company, domestically or overseas, for cash, without recompensating any token holders.

        > Securities regulation and law stops that. But the tokens do need to be lawful securities in order for the court to recognize them.

        This. IRS regards coins and tokens as capital gains taxable things regardless of whether they qualify as securities. SEC exists to protect investors from scams and unfair dealing. In order to protect investors, SEC regulates issuance of securities.

  • wpietri 2298 days ago
    It's way down, but this strikes me as the key section:

    ---

    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 of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.

    I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.

    ---

    That seems a pretty clear warning: most ICOs will be treated as securities under US law. I'd be willing to bet that the SEC will be making an example of some people relatively soon.

  • Ologn 2298 days ago
    Jeff Bezos once asked Warren Buffett why people did not follow Buffett's model of investing, since it had made Buffett the third richest person in the US. Buffett replied, "no one wants to get rich slowly".
  • johnwheeler 2298 days ago
    I wouldn’t read this with rose colored glasses. This is not pro or against crypto. He’s simply doing what the SEC does and warning speculators of the risks involved and saying that these will, despite what anyone has told you, be subject to federal securities laws.
  • olivermarks 2298 days ago
    Jay Clayton

    '1] This statement is my own and does not reflect the views of any other Commissioner or the Commission. This statement is not, and should not be taken as, a definitive discussion of applicable law, all the relevant risks with respect to these products, or a statement of my position on any particular product. '

    Intriguing that this is a personal perspective....

    • allenz 2298 days ago
      It isn't yet practical for the SEC to regulate crypto formally because the industry is still in its early stages and evolving rapidly. The SEC needs to balance many interests, and it's not clear what the costs and benefits will be.
    • wmf 2298 days ago
      Translation: I'm not allowed to officially say that all of this stuff is illegal, but... you should ask if it's legal.
  • stale2002 2298 days ago
    "In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come."

    I am impressed with this SEC statement.

    The problem right now is with ICOs that sell tokens for something that doesn't already exist yet, as well as promise returns.

    Selling a token for something that doesn't exist yet is clearly a security. Whereas selling a token that already exists, and doesn't need any additional things to be built, is probably not a security.

    I am glad that the SEC seems to be getting things right.

    • just_one_time_ 2298 days ago
      No ICO promises returns, you are an idiot.
  • Animats 2298 days ago
    What the SEC seems to be doing is 1) warning ICO promoters that what they're doing may be illegal, and 2) going after the worst offenders first. The SEC has already acted against two ICO promoters, both of which were clearly running scams. There will probably be more actions.
  • drawkbox 2298 days ago
    As I have stated previously, these market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.

    I think for a long time this is how crypto is viewed, it is risky but people are willing to take the risk currently. More reputable US sources like Coinbase are making this possible rather than historical risky bets like mtgox, btc-e etc. In the statement they do mention whether an ICO is domestic/foreign in their research as something you should look out for in terms of the "security" of your purchase, but also whether or not the SEC can even do anything about it.

    Regulation will be coming along and they have a blueprint for how that might happen, i.e. securities vs tokens/coins/currency. Before the regulation the risk is higher but probably also the reward.

    At this point cryptocurrencies and ICOs are an unstoppable train, either the SEC will be able to regulate currencies + securities or some new group will be formed to handle oversight in the US at least.

  • projmayhem 2298 days ago
    It's obvious the SEC intends to enforce securities regulations on crypto markets. The big exchanges already and typically employ experts in regulatory compliance specifically related to AML and KYC laws on a federal and state-by-state level. The reason being access to Americans is by and large more important than access to any other set of customers. And "everyone" knows ICO's exist only to side-step securities laws and make a quick buck. There are very few legitimate offerings. Expect the SEC enforcement arm to come down like the hammer of god.

    What I find funny is this idea crypto won't be the next level of monitoring and control of the money supply. You crypto proponents are going to be very unhappy when you see what Uncle Sam has in store. Fiat currency has much better built-in anonymity then this block chain nonsense. And see how that is controlled, regulated, and tracked through treaties, laws, and digital mechanisms?

  • justinjlynn 2298 days ago
    Does anyone know if the SEC has any process to formally approach them and say "This is what we're planning on doing and the structure we're planning on using -- this where we're unclear; how would you treat this?" like the IRS has with Private Letter Rulings/Written Determinations?
  • gchokov 2298 days ago
    Sounds like - do what you want at your own risk and due diligence. I can't help but think that large financial institutions and governments are also behind the crypto madness in order to make money on the retail's back. Otherwise, this would have been stopped by now.
    • kodablah 2298 days ago
      I think they are behind it and haven't brought the hammer down because they don't want to encourage "going dark" (or even darker than they already are). Surely they're finding their enforcement arm much more limited than in traditional markets. Not embracing new markets will only make that worse.
  • brucephillips 2298 days ago
    Can someone explain to me how his "book of the month" club example is not a security? The managerial efforts of the club managers will increase demand for participation in the club, increasing the value of the token. What am I missing?
    • stale2002 2298 days ago
      The difference is that books already exist.

      It is not about whether a token can rise or fall in value. It is about whether the token represents something that can be bought right NOW, or if it represents a future promise of some sort for something that doesn't exist yet. IE, funding book publishing in this example.

      • brucephillips 2298 days ago
        > It is not about whether a token can rise or fall in value.

        Yes, it is. According to the Howey Test.

    • solatic 2298 days ago
      > The managerial efforts of the club managers will increase demand for participation in the club, increasing the value of the token.

      The value of the token is determined by the value of the books being shipped and the frequency and reliability of their shipment. The club managers do not affect the value of the books themselves, do not claim to affect the value of the books over time, and do not promise to provide a secondary market for those books whereby the price of the books in the future may be greater than the price of the books as delivered and thus the token is not a security representing the books. That the token itself may be privately transferred from one holder to another, without notifying or involving the token manager, doesn't make the token substantially different than, say, transferring your newspaper or magazine subscription to another person, and such subscriptions are clearly not securities.

      If you did, instead, promise book token investors that there would be a secondary market for the tokens where they can easily and publicly find buyers for their tokens, and that those book club tokens would rise in value through the efforts of the book club token manager and not through the change of price, outside of the control of the book club token manager, of the underlying books, then yes, people buying the tokens deserve to understand on what principle the book club token manager's efforts will increase the value of the tokens, what risks there are associated with the manager's efforts and the promised secondary market, etc. and therefore the token is now a security.

    • rficcaglia 2297 days ago
      I think their key concern is this:

      >It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens

      So let's say we had an ICO for participation in a rare book club of the month. And the books themselves were trading on the secondary market. That would be ok as I interpret this.

      But if the token itself is being traded and is the asset, I think that's where the SEC gets involved.

      Where I am unclear is if I have a presale for the Rare Books, and the means of currency for the future delivery of the yet-to-be-acquired rare book is a token, and that token may rise in value and transfer ownership is that a security? All the token provides me is the right to receive a rare book in the future.

    • vasilipupkin 2298 days ago
      The difference is nobody would attempt to buy this participation to resell it later for a higher price
      • brucephillips 2298 days ago
        Why not?
        • vasilipupkin 2298 days ago
          Because there would be no secondary market, no exchanges, no investors, etc. but if there existed such a market and issuers of these rights talked about how these can be resold for a higher price, then it's a different story
          • brucephillips 2298 days ago
            Nothing in his description precluded those features.
    • Frogolocalypse 2298 days ago
      Because the issuers of the token (management) don't directly benefit from its use. It is the selling and profiting off the token that makes it a security. If it provides utility to the participants and doesn't provide a direct incentive to the issuer, it is not a security.

      ICO's certainly bring all of these things into a discussion though, don't they?

    • wmf 2298 days ago
      The value might increase if there's an artificially capped supply, but not otherwise. If demand increases they can just issue more tokens.
      • brucephillips 2298 days ago
        So a token in an exclusive book club would be a security?
  • josephagoss 2298 days ago
    This is quite positive and in line with how ASIC (our SEC in Australia) are treating these types of assets.

    Both are quite opposite to the way China is handling ICO's and crypto currency in general.

    • dmoy 2298 days ago
      China's also got laws against moving a lot of money out of the country, so not entirely unexpected.
  • lurr 2297 days ago
    > encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so.

    so what, are we going to stop seeing "US IP detected, unable to participate" in ICOs?

  • api 2298 days ago
    Side note but: I asked here if anyone's actually using an ICO project:

    https://news.ycombinator.com/item?id=15901992

    Didn't get much traction. :(

  • teknologist 2298 days ago
    Much better than China's response to ICO's. This is how it should be done.
  • LeicaLatte 2298 days ago
    Very encouraging response. Kinda shocked to be honest.
  • neuromancer2701 2298 days ago
    What about using the ICO tokens as a sort of gift certificate for your product at a later date?

    Isn't that what Brave did with the BAT ICO?

  • readhn 2298 days ago
    ...and this is how the collapse begins
  • dzonga 2298 days ago
    After all this is written, you'll still find someone tryna peddle their little tokens out here!!
  • tptacek 2298 days ago
    I encourage Main Street investors to be open to these opportunities

    This is ominous.

    • swyx 2298 days ago
      What else do your elf eyes see?
      • mLuby 2298 days ago
        They're taking the ICOs to Estonia!
    • adsfasdf2332 2298 days ago
      ...
  • xHopen 2298 days ago
    Buy the dip
  • idibidiart 2298 days ago
    I think the rate of technological change will force the SEC regulatory system to adopt an RFC process open to the public (bypassing Congress), similar to IETF, and I think Direct Democracy is an inevitable outcome of such disruption.
    • rahulrrixe 2298 days ago
      That's a really strong statement. RFC structured this way because they needed people to contribute whereas SEC and Congress don't want people involvement.
      • idibidiart 2298 days ago
        The regulatory process is not scalable relative to the rate of technology driven disruption.

        It cannot scale.

        It can either fall behind or adapt to change, IMO.

  • prakashrj 2298 days ago
    But since there is no intermediary between your transactions in crypto, please be aware of fraud. You are completely responsible and accountable for all actions you take with your money. There will be nobody to blame in crypto :)

    This is what most governments are warning people against. It's more easy to scam people than before. Really.

  • ataturk 2298 days ago
    Why do we let this crap happen? ICOs and cryptocoins are a bubble that is now big enough to be an existential threat to the overall markets and when they blow, they are going to take down all kind of other things with them. I went through this with the dot-com bubble, the housing bubble, now the freaking crypto "nothingness is something to invest in" bubble.

    Some people really saw Millenials coming from a mile away.

  • just_one_time_ 2298 days ago
    Its a lot of fun watching you idiots play catch up.

    I made my million and then some. I'm upset with you guys, I'm here everyday and have tried talking about Bitcoin all the time, just to get shot down.

    I hope you all die.

  • Smith_seth 2298 days ago
    I GOT MY PROGRAMMED BLANK ATM CARD TO WITHDRAW A MAXIMUM OF $5000 DAILY. I AM SO EXCITED BECAUSE I ORDERED AND PAID FOR DELIVERY, DIDN'T GET SCAMMED, AND I NOW OWN MY HOME, MY BUSINESS HAS GROWN BIGGER. GEORG BEDNORZ (georgbednorzhackers@gmail.com) IS THE NAME OF THIS USA HACKER THAT GAVE ME THE CARD AND ALSO HE IS OFFERING ALL KINDS OF LOAN WITH ONLY 2% INTEREST RATE.
  • crispytx 2298 days ago
    LMAO, the SEC is going to shut down Coinbase and Bitcoin is going to zero. Suckers!
  • fictionfuture 2298 days ago
    Seems to me this is just a warning so that when both the SEC and US Treasury lay into cryptos next year they won’t feel so bad about everyone losing their BTC/ETH “fortunes” overnight.