Is the SEC softening its reaction to coin offerings?
The literature and the legal hsitory relating to coin offerings defies summarization, let alone in a brief blog post, but the SEC this week issued a no-action letter which permitted a company to effect a coin offering without the usual objection, injunction or fine. The reason is an update of orange groves to jet planes.
What is a security? That is the only thing the SEC can regulate. Per the US Supreme Court in a decision that has stood since 1946, it is an investment in a common enterprise while expecting profit from the efforts of others; that ancient case involved purchasers of orange groves, to be managed by the seller who would do all the work and send back the profits to the “owners” of the land and trees.
Along comes Turn-Key Jet Inc., a charter service. They convinced the SEC that, under recent SEC Guidance, they should not be required to registered their coin issuance since it was clear that the coins, regardless of their suspicious character and evil potential upon initial sale, would be used only to buy air charter services.
Analytically, this slope could be slippery. You could for example use coins to wholly finance a start-up business, allow use of coins for only the product or service offered by that business, and use the coin to obtain that product or service at a reduced price. How is that different from investing thru coin offerings in a company to jump-start it, then earning money, and then spending it on a product from a third party? Your return is economic value based on the success of the company in which you invested but which was run by others.
Yes it is different of course, but how different? This is not a new debate. I had a case involving time shares in a motel in the middle of nowhere to be used as a hunting lodge. No coins involved (this was perhaps 35 years ago), but the debate was the same: you give me money and I set up a business with it and I give you a sweetheart deal on the rent (or product — or trip on a jet?).
But the evolution of coins with non-speculative elements into something free of SEC interference is a practical development in the marketplace, and the SEC seems now receptive to applying some logic for the benefit of the marketplace. The issue may ultimately turn on the express litmus test of whether there is any de facto trading element to the coins.That is an implicit alteration of the Supreme Court test, however.
Would that be a shocking development from a technical lawyering standpoint? Depends on your view of whether words that are clear must be read in a policy context. After all, the statutory definition of a security specifically includes “note” (in the Securities Act it is in fact the very first definition, before the word “stock”), but the mortgage note you sign on your house is not a security.