Applying Howey to ICOs | Blockchain and Cryptocurrency: What You Need to Know | 2019

TL;DR

Initial Coin Offerings (ICOs) are likely to be considered securities based on the Howey Test, requiring registration or exemption under federal securities laws.

Transcript

so now let's consider how we apply the how we test to initial coin offerings and we can just run down the checklist remember an initial coin offering is a situation where you're going to be sending crypto to a third party based on a white paper and you're going to get code in return and you're going to hope that that code winds up being worth more ... Read More

Key Insights

• 🥳 Initial Coin Offerings (ICOs) involve investors sending cryptocurrency to a third party based on a white paper in exchange for code.
• 🤑 ICOs meet the requirements of an investment of money, horizontal and vertical commonality, expectation of profit, and dependency on the efforts of others.
• 🖤 ICOs are primarily pursued for investment purposes, as the cryptocurrency obtained lacks utility and is intended to be sold at a higher price.
• 🥺 The lack of an alternative regulatory regime leads to the SEC's jurisdiction in regulating ICOs as securities.
• 👮 Non-registered ICOs may be in violation of federal securities laws if they fail to qualify for exemptions.
• 🦄 Supreme Court precedent suggests that the SEC would have authority over ICOs, as there is no other regulatory agency specifically focused on cryptocurrencies.
• 🦄 Adherence to the Howey Test indicates that the majority of ICOs would be classified as securities and subject to SEC regulation.

Questions & Answers

Q: What is an initial coin offering (ICO)?

An ICO is a situation in which investors send cryptocurrency to a third party based on a white paper, expecting to receive code in return that will potentially increase in value when the system launches.

Q: Why do ICOs meet the requirements of an investment of money and horizontal/commonality?

Participating in an ICO involves pooling money with other investors, contributing cryptocurrency as an investment. This creates horizontal commonality, as multiple individuals are investing in the same ICO.

Q: What is the expectation of profit in ICOs?

Investors in ICOs buy cryptocurrency not to use, but with the hope of selling it to others at a higher price. Since the crypto does not yet exist or have any utility at the time of purchase, the primary purpose is financial gain.

Q: Why are ICOs considered securities and subject to SEC regulations?

Based on the application of the Howey Test, ICOs generally meet the criteria of an investment contract, making them securities. As there is no clear alternative regulatory regime, the SEC has jurisdiction over regulating ICOs unless qualified exemptions are met.

Summary & Key Takeaways

• ICOs involve sending cryptocurrency to a third party in exchange for code, with the expectation of selling the crypto for a higher value in the future.

• ICOs meet the requirements of an investment of money, horizontal and vertical commonality, expectation of profit, and dependency on the efforts of others.

• Due to the lack of an alternative regulatory regime, ICOs are likely to be classified as securities and subject to SEC regulations.