Coin Offering Revisited

In December, 2018, I posted an article about proposed Federal legislation to define coin offerings the SEC would NOT treat as securities offerings.  That bill died but has just been re-introduced in modified form, and purports to define tokens which will not be SEC-regulated.  The Token Taxonomy Act, with some bipartisan support, seeks to provide clarity for blockchain-based start-ups issuing coins.

Although blessedly the newly-proposed statute fixes a mandatory national standard (pre-empting  possibly inconsistent State regulation), some commentators claim the new law is too simplistic.  The  appealingly simple part is that the law would exempt digital tokens the histories of which are recorded on a distributed, digital ledger (can you say “blockchain”?)  and do not represent a financial interest in any particular business entity.  The fear is that the dividing line suggested cannot be sharp enough; if the original payment goes into, say, Company X,  and Company X uses the money to finance itself and then affords the Company X product at a discount, is that not like a security (investor pays money, company builds itself on the money, company gives something of economic value to investor such as the product itself, or a discount on the product, or access to the product).

A recent SEC decision suggest such a model will not be SEC-regulated if the tokens cannot be sold to create a currency, but the SEC insists on a case-by-case approach and to date has not commented on the proposed law (filed April 9).

Question: I send a down payment to a company to purchase the company’s widget (let’s say it is a really big, expensive widget).  The company takes my deposit, records it as a down payment, goes out and buys a new widget-maker machine, hires an engineer and and a laborer, builds my widget and ships it to me.  How different is that from a digital token that works the same way?  Why would it matter if my purchase order were sold to another buyer, even for a profit, the transaction being added to a blockchain–or not?

Ever notice how technology is stressing our legal system in search of good analogies where there is no clear precedent?   I keep reminding people that THE seminal case in the definition of a security is a seventy-two year old Supreme decision about an orange orchard.  I fear that it is likely a stretch to say that the law today is asked to compare an apple with an orange– but is that true if, say,  I capitalized the “Apple”?



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