Ico Imp

From Initial Coin Offerings to Security Tokens:
A U.S. Federal Securities Law Analysis
Michael Mendelson *
22 STAN. TECH. L. REV. 52 (2019)
ABSTRACT
Cryptocurrencies and initial coin offerings (ICO) are all the rage in startup financing.
Until mid-2017, these ICOs existed in a wild west environment, a regulatory limbo, with
some companies raising hundreds of millions of dollars in days and others crashing and
burning in the same amount of time. Like Wyatt Earp in Dodge City, the Securities and
Exchange Commission declared its jurisdiction over these ICOs, laying down the law in
the “DAO Report” with the legal equivalent of a double barrel shotgun. The SEC was right
to do so. There is no doubt that the overwhelming majority of ICOs involve the sale of
securities and companies who ignore this conclusion do so at their own risk. Yet the law of
ICOs and digital token financing is by no means final or clear, and with little official
guidance to go on, startups are left to fend for themselves in a sea of self-declared experts.
Few scholarly articles to date have addressed the regulatory status of these ICOs from a
securities law perspective. This article provides a legal framework and method for analysis
in the aggressive, case-by-case approach laid down by the SEC in the DAO Report, and
recommends best practices for companies considering an ICO to follow.
*Michael Mendelson is a partner with Wissing Miller, LLP (www.wissingmiller.com), a boutique

intellectual property and technology business law firm. The author would like to thank Professor
Joshua Teitelbaum of Georgetown University Law Center for his advice and guidance in the de-
velopment of this article.
52
Winter 2019 FROM INITIAL COIN OFFERINGS TO SECURITY TOKENS 53
TABLE OF CONTENTS
INTRODUCTION ................................................................................................................. 53
I. DIGITAL TOKENS: BLOCKCHAIN BITCOIN, ETHEREUM, ALTCOINS . 56
II. THE INITIAL COIN OFFERING................................................................................ 60
III. OVERVIEW OF US FEDERAL SECURITIES LAW – WHAT IS A SECURITY
............................................................................................................................................... 64
IV. THE HOWEY TEST, THE SEC, AND THE DAO 21A REPORT........................ 66
V. WHEN ARE DIGITAL TOKENS SECURITIES? – THE HOWEY ANALYSIS
............................................................................................................................................... 73
VI. ADAPTING TO THE POST-DAO REPORT ENVIRONMENT: PRACTICE
GUIDELINES.................................................................................................................... 82
VII. BEST PRACTICES FOR U.S. COMPANIES PLANNING AN ICO ................. 88
VIII. STATE OF THE MARKET POST DAO REPORT................................................ 91
IX. CONCLUSION ................................................................................................................ 93
INTRODUCTION
The rise of Bitcoin and Ethereum has led to the rapid creation of new networks
built on blockchain technology and supported by new cryptocurrencies or digital
tokens. According to “coinmarketcap.com,” over 2,100 cryptocurrencies’ tokens
are traded on a daily basis.1 In the first half of 2018, over US$11.69 Billion was
raised through token sales, frequently called “initial coin offerings” or “ICOs.” 2
This is almost six times the amount raised through traditional angel investment and
early stage venture capital funding. Digital token sales have in large part bypassed
traditional financial institutions such as investment banks, accounting firms, and
Wall Street law firms. Yet the true value of these tokens is hard to quantify, based
on thin information and driven largely by investor sentiment and enthusiasm, ra-
ther than finance fundamentals.
Through July 2017, virtually all of these ICOs were held without any kind of
government filings that would normally be required in a public financing event.
1. All Cryptocurrencies, COINMARKETCAP, https://perma.cc/FD3R-MTT6 (archived

Oct. 19, 2018 3:12 PM PST).
2. Peter Terlato, ICO Market More Than Doubles in Q2 2018, yet More Than Half Have Failed:
Report, FINDER (Aug. 9, 2018), https://perma.cc/59GH-BX6F.
54 STANFORD TECHNOLOGY LAW REVIEW Vol. 22:1
“Dumb money” has followed “smart money,” which is to say that investment in
digital tokens and blockchain projects is no longer the sole province of technically
and, to a lesser degree, financially sophisticated investors with the training and ex-
perience to evaluate the viability of a given project. Articles on blockchain, Bitcoin,
and token sales abound in the popular press. Even celebrities such as boxing cham-
pion Floyd Mayweather have been in the news for the endorsement of legally ques-
tionable ICOs.3
ICOs had operated in a regulatory gray area, with many turning a blind eye to
whether securities regulation applied. The exuberance in the marketplace has made
ICOs and token purchasers the targets of scams, pyramid schemes, large
cyberthefts, and flash price crashes. The potential for fraud on token purchasers is
significant. 4
With the release of a 21A investigative report (the “DAO Report”) in July 2017
on “The DAO,” the Securities and Exchange Commission (“SEC”) has stepped cen-
ter stage into the fray, declaring that digital tokens may be investment contracts and
therefore securities subject to the regulation of the SEC, both in their initial sale and
in secondary market trading. 5 In the post-DAO Report environment, companies
must perform a thorough technical network analysis and an equally thorough reg-
ulatory analysis to determine whether their tokens could be considered a security.
The decision may also depend on the functions of the token and the stage of the
blockchain network’s development. If the primary goal is to raise money, rather
than to build a network, the benefits of conducting a token sale raise both legal and
business issues that require thorough consideration.
It is not clear, however, the extent to which a digital token is a security under
the investment contract test set forth in Securities and Exchange Commission v. W.J.
Howey Co., 6 the seminal case heard before the Supreme Court in 1946 that has been
legal doctrine for over seventy years, and the basis for the SEC’s recent determina-
tion in the DAO Report.
It is not obvious that cryptocurrencies and digital tokens fit neatly into a single
3. Nikhilesh De, Founders of ICO Endorsed by Floyd Mayweather Indicted for Fraud,
COINDESK (May 15, 2018, 8:00 AM UTC), https://perma.cc/2NKV-VJMT.
4. See Ana Alexandre, New Study Says 80 Percent of ICOs Conducted in 2017 Were Scams,
COINTELEGRAPH (July 13, 2018), https://perma.cc/F7ZY-95DD.
5. U.S. SECURITIES AND EXCHANGE COMMISSION, REPORT OF INVESTIGATION PURSUANT TO
SECTION 21(A) OF THE SECURITIES EXCHANGE ACT OF 1934: THE DAO 1-2 (2017) [hereinafter U.S.
SECURITIES AND EXCHANGE COMMISSION].
6. 328 U.S. 293 (1946).
category of regulation. In addition to the SEC, the Commodities Futures Trading

Commission, the Treasury Department, and the Office of the Comptroller of the
Currency have asserted some form of jurisdiction over these new units of value. 7
Arguably, cryptocurrencies are a new class of assets altogether that defy easy cate-
gorization into the existing legal framework. However, for the purposes of this pa-
per, I only address digital tokens through a securities lens.
This paper is not intended to make grand declarations or sweeping generaliza-
tions on what the law governing digital tokens should be. Rather, this paper takes
the existing legal framework established to date and provides a method of analysis
to determine whether a given digital token constitutes a security under U.S. federal
law. This paper also makes recommendations for best practices for companies con-
templating an ICO to follow.
Published academic work to date on this topic is scant. Important works of
note include the securities framework published by Coin Desk and Debevoise &
Plimpton, the writings of David Yermack at New York University Stern School of
Business, and the works of David Lee Kuo Chuen at the Lee Kong Chian School of
Business in Singapore. The works of these authors are cited in this paper. Other
than the Coin Desk–Debevoise paper, which pre-dates the DAO Report’s release
by seven months (a long time in this new field), the majority of the work is both
business school oriented and focused on Bitcoin, rather than alternative tokens. To
date, the literature has not provided a comprehensive assessment of the factors to
consider when working with counsel to make the security/not security determina-
tion. My contribution to the developing literature is a post-DAO Report securities
regulation analysis and recommendation of best practices for an ICO.
The first section of this paper provides a technical and general historical over-
view of Bitcoin, Ethereum, and alternative tokens. The second section provides a
history of the initial coin offering. The third section presents an overview of federal
securities laws and what is a security generally. This leads into the fourth section,
which addresses the DAO Report, the Howey test analysis, and SEC actions taken to
date. In the fifth section, I proceed to apply the Howey test analysis to digital tokens
generally, following analogous Howey case law and using the DAO Report as a back-
drop. Section six discusses financing options for start-up token-based networks
7. See, e.g., Cryptocurrency Update: CFTC Reaffirms Jurisdiction over Certain Virtual Currency
Transactions, ROPES & GRAY (Oct. 19, 2017), https://perma.cc/2HM6-L4RU; OCC Opens FinTech
Bank Applications, Paves Way for Crypto Exchange Regulation Streamlining, BITCOIN EXCHANGE
GUIDE (Aug. 2, 2018), https://perma.cc/UVZ5-JT6D.
under existing SEC safe harbors. Section seven addresses best practices for compa-
nies that are intent on holding an ICO, followed by a discussion of the current state
of affairs and questions to be addressed going forward.
I. DIGITAL TOKENS: BLOCKCHAIN BITCOIN, ETHEREUM, ALTCOINS
While the subject matter has been addressed extensively in both technical jour-
nals and the popular press, no discussion of initial coin offerings or digital token
sales is complete without at least a high-level overview of the underlying technol-
ogy on which these networks and their digital assets are grounded. The program-
ming and mathematical principles on which these networks are based will not be
discussed in this paper as there are far better sources widely available that the reader
can use as a reference, regardless of one’s background in computer science.
EARLY DIGITAL AND CRYPTOCURRENCY SYSTEMS
It is worth noting that neither Bitcoin, nor Ethereum, nor other blockchain
networks in use as virtual currencies were the first to appear on the Internet. Forms
of digital currency and token systems have existed since the late 1990s, in the form
of loyalty points earned as a reward for using an ecommerce platform to purchase
goods and services or virtual currency systems that are used exclusively inside gam-
ing systems (such as the “gold” currency in World of Warcraft). eCash 8 and e-Gold 9
were early pre-blockchain micropayment and currency systems used with varying
degrees of success and not without technical and legal problems of their own. Pay-
Pal, too, is a form of payment system—not a currency in and of itself, but a money
transfer business and method of processing payments through participating ven-
dors backed by credit cards and requiring third party verification. With the advent
of blockchain technology, we are finally beginning to see the widespread usage and
proliferation of virtual currencies and payment systems that do not require third
party intermediaries.
BLOCKCHAIN – DISTRIBUTED LEDGER TECHNOLOGY
Blockchain, the information technology buzzword of the moment, is most
8. See Ecash, WIKIPEDIA, https://perma.cc/8CPD-V9PV (archived Oct. 19, 2018 3:18 PM

PST).
9. See E-gold, WIKIPEDIA, https://perma.cc/6GPT-EQQB (archived Oct. 19, 2018 3:18 PM
PST).
simply defined as a shared, immutable system for recording and storing infor-
mation in such a way that the record cannot be altered retroactively without alter-
ing all subsequent records or blocks. 10 The “blocks” on the blockchain are the rec-
ords of the valid transactions across the network, coded with a hash function. Each
subsequent block includes the hash of the prior block, linking them together. 11 This
“chains” the blocks together, hence the term “blockchain.” As the number of trans-
actions grows, so does the blockchain, which records the time and sequence of each
new block. 12
The blockchain, therefore, is a “shared, distributed ledger that facilitates the
process of recording transactions or tracking assets in a business network.” 13 As
such, it is a distributed database for recording transactions.14 By “distributed,” we
mean that there is no centralized storage location such as a central server or a cloud
computing platform; rather, the information and technical transactions are spread
across a wide network of computers. In the blockchain model, the network is based
on a peer-to-peer distributed architecture that requires consensus calculations or
algorithms to ensure that the transactions across the blockchain network are repli-
cated so that the ledger maintains its integrity. There is no central repository of data
and no central processor executing the algorithms. Anyone with access to the block-
chain network will see the same information. Blockchain technology was developed
to meet the need for an efficient, cost-effective, reliable, and secure system for con-
ducting and recording financial transactions.15 Blockchain networks can be public
and accessible by anyone, such as Bitcoin and Ethereum, to be discussed further
below, or private and permissioned, such as a corporate network for asset tracking
and require access control. The blockchain concept was first coined in the Bitcoin
white paper by Satoshi Nakamoto, in which the distributed ledger is referred to as
“a chain of blocks.” 16
10. See MANAV GUPTA, BLOCKCHAIN FOR DUMMIES 1 (2017); see also Blockchain, WIKIPEDIA,
https://perma.cc/FN5L-BLLA (archived Oct. 19, 2018 4:03 PM PST) (citing Blockchains: The
Great Chain of Being Sure About Things, THE ECONOMIST (Oct. 31, 2015), https://perma.cc/NJ9C-
4E38).
11. See GUPTA, supra note 10, at 14.
12. See id. at 13.
13. Id. at 3.
14. See id. at 15.
15. See id. at 15-16.
16. SATOSHI NAKAMOTO, BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM 7 (2008),
https://perma.cc/43H5-QCSK.
BITCOIN
Bitcoin is the first practical solution to a longstanding problem in computer

science called the Byzantine Generals Problem. The problem is how to establish
trust between otherwise unrelated parties over an untrusted network like the In-
ternet. The original paper defining the B.G.P. explains:
“[Imagine] a group of generals of the Byzantine army camped with their

troops around an enemy city. Communicating only by messenger, the
generals must agree upon a common battle plan. However, one or more
of them may be traitors who will try to confuse the others. The problem
is to find an algorithm to ensure that the loyal generals will reach agree-
ment.” 17
On October 31, 2008, a person or group of persons under the name of Satoshi
Nakamoto published a white paper entitled, “Bitcoin: A Peer-to-Peer Electronic
Cash System” on bitcoin.org.18 In that paper, Nakamoto proposes a peer-to-peer
distributed ledger platform for the processing of financial transactions without re-
lying on trusted third parties for their execution.19 The blockchain is a record of the
Bitcoin transactions. Trust is incorporated into the structure of the network.
The Bitcoins themselves are units of account on the system or ledger. “You buy
into the ledger by purchasing one of a fixed number of slots, either with cash or by
selling a product and service for Bitcoin. You sell out of the ledger by trading your
Bitcoin to someone else who wants to buy into the ledger. Anyone in the world can
buy into or sell out of the ledger any time they want – with no approval needed, and
with no or very low fees.” 20
Users can apply computing power to solve mathematical puzzles to validate the
Bitcoin transactions across the network and write them to the network, creating a
new blockchain. The successful completion of these puzzles rewards the victor with
new Bitcoins and possibly transaction fees. Those who attempt to solve these cal-
culations are called “miners,” the Bitcoin method of mining is called a “proof of
work” system.
17. Marc Andreessen, Why Bitcoin Matters, N.Y. TIMES (Jan. 21, 2014),
https://perma.cc/W4T5-Z3PS (quoting Leslie Lamport et al., The Byzantine Generals Problem, 4
ACM TRANSACTIONS ON PROGRAMMING LANGUAGES & SYS. 382, 382 (1982)).
18. Nakamoto, supra note 16.
19. Id. at 1.
20. Andreessen, supra note 17.
The Bitcoin code was released as open source in 2009. Originally used by com-
puter scientists, hackers, and other tinkerers, Bitcoin became the gold standard for
digital currency, also called cryptocurrency (a portmanteau of cryptography and
currency). Cryptocurrencies have been used for both legitimate and illegal transac-
tions, gaining both credibility and notoriety. “A growing ecosystem surrounds
Bitcoin, including exchanges, transaction services providers, market information
and chart providers, escrow providers, joint mining operations and so on.” 21
A growing demand for an independent currency system has skyrocketed the
value of Bitcoins. In October of 2011, a single Bitcoin was worth approximately
US$2.00. In December 2017, Bitcoin reached a high of nearly US$20,000. Over-
speculation and high-profile cyber thefts of digital wallets have cut this down to
size. As of October 10, 2018, a single Bitcoin is traded at approximately $6,653—
still well above its early value, and relatively stable for the time being. Secondary
exchanges have also grown to facilitate the use of government-issued (“fiat”) cur-
rency to buy or sell Bitcoins.
As a unit of value, Bitcoin has no connection to fiat currency and therefore has
no intrinsic value. It only has value because the global user community believes it
to have value. Furthermore, Bitcoin accounts or wallets are uninsured by either
government programs or private industry, although the latter may change over
time. The extent to which Bitcoin itself is a currency, a commodity, or an asset is
not examined here. Professor David Yermack of New York University’s Stern
School has addressed this subject very well already. 22
Recognizing the importance of Bitcoin, but seeing room for improvement, oth-
ers created newer cryptocurrency ecosystems. The most important of these today
arguably is Ethereum, the cryptocurrency platform on which many new digital to-
kens are created and new ICOs are launched.
ETHEREUM
Like Bitcoin, Ethereum was first described in a white paper—in this case, one
21. Reuben Grinberg, Bitcoin: An Innovative Digital Currency, 4 HASTINGS SCI. & TECH. L.J
160, 165 (2012).
22. See DAVID YERMACK, IS BITCOIN A REAL CURRENCY: AN ECONOMIC APPRAISAL (National
Bureau of Economic Research, Ser. No. 19747, 2014) (arguing that Bitcoin behaves less like a
currency and more like a speculative asset akin to Internet stocks in the late 1990s, giving further
credence to the subject matter of this paper). Regardless, Bitcoin in and of itself is unlikely to be
regulated as a security by the Securities and Exchange Commission. Id.
written by Russian-Canadian programmer Vitalik Buterin in 2013. Ethereum ini-

tially released as a functional network in 2015. The value token on the Ethereum
network is called “Ether” (traded on cryptocurrency exchanges under the symbol
“ETH”). Ethereum builds on the Bitcoin network by adding certain features and
functionality, discussed below. Whereas Bitcoin can be understood as a system for
generating a shared global ledger that securely records bitcoin balances, Ethereum
applies many of the same principles to generate a shared global computing platform
that can flexibly but securely run a variety of applications, including virtual curren-
cies. 23
For the purposes of our discussion on ICOs, the most important of Ethereum’s
new features are (1) “smart contracts” which are, in a general sense, automatically
executed agreements for the exchange of goods or services through the execution
of computer code transacted through Ether tokens, rather than through the ex-
change of documents and the actions of individuals and (2) the ability to create ad-
ditional digital tokens (“altcoins” or “colored coins”) based on the Ethereum plat-
form without having to build an entirely new independent network. 24 It is the
colored coin protocol that has allowed start-up projects to launch token sales fairly
rapidly, and led to their exponential growth.
The value of Ether has grown rapidly as well but is still dwarfed by Bitcoin.
Ether hit a high of almost US$1,400 in late January 2018, and like Bitcoin, it has
come back down to earth. As of October 19, 2018, Ether trades for approximately
US$203. 25 The Ethereum ecosystem appears to have a greater value as a platform
for startups building new blockchain networks on which to hold an ICO through
the use of colored coins, rather than an innate use as a virtual currency.
II. THE INITIAL COIN OFFERING
As Bitcoin and Ethereum became more established, new projects developed

that added new functionality and mining concepts, improved on the existing pro-
tocol, and addressed security. One project, called Mastercoin, is notable as the first
major project to undertake a crowdfunding digital token sale. Mastercoin, now
23. See Vitalik Buterin, What is Ethereum?, COIN CENTER (Mar. 9, 2016),
https://perma.cc/EKW8-UE96.
24. See Vitalik Buterin, A Next Generation Smart Contract and Decentralized Application Plat-
form, GITHUB, https://perma.cc/T2T6-8NYK (archived Oct. 19, 2018).
25. All Cryptocurrencies, supra note 1.
known as Omni, 26 is a digital currency and communications protocol built on the

Bitcoin protocol; it aims to enable complex financial functions in a cryptocur-
rency. 27 The objective of Mastercoin was to establish a protocol on which other
altcoins could be built. 28 This is the model that Ethereum subsequently pursued to
much greater success, which is evident from the number of ICOs that have based
their tokens on the Ethereum platform.
The Mastercoin white paper was published in January 2012, and the project
officially launched on July 31, 2013. 29 Mastercoin held a month-long public sale of
digital tokens to raise money for the project, selling “Mastercoins” to approxi-
mately 500 purchasers and raising US$500,000 in the process.30 As the first public
sale of digital tokens, 31 this could be considered the first real ICO. At the end of
December 2013, Mastercoin traded for approximately US$181 per coin, with a
market capitalization established at over US$112M; the value has dropped consid-
erably over time as the project has stagnated. 32 Mastercoin rebranded as Omni in
2015 33 and traded at US$99.82 with a total market capitalization of approximately
US$60M as of January 10, 2018. 34
Other token sales followed that of Mastercoin. The MaidSafe ICO in 2014 was
based on the Mastercoin protocol.35 While it raised around US$7M in its token
sale, the value dropped significantly and swiftly to US$5.5M as the value in Mas-
tercoin dropped, demonstrating a particular problem of tokens dependent on an-
other underlying platform.36 Another pertinent example can be found in Storj.
26. Omni (Mastercoin) (OMNI), COINGECKO, https://perma.cc/ZB47-PGNS (archived Nov.

11, 2018).
27. See Mastercoin, BITCOIN WIKI, https://perma.cc/8XFQ-J98N (archived Oct. 25, 2017);
see also Omni Layer, OMNI, https://perma.cc/R6HN-CMNM (archived Dec. 18, 2018).
28. Id.
29. COINGECKO, supra note 26; see also Vitalik Buterin, Mastercoin: A Second-Generation Pro-
tocol on the Bitcoin Blockchain, BITCOIN MAGAZINE (Nov. 4, 2013 5:15pm),
https://perma.cc/9CTW-76R5.
30. Chris Abraham, The Origin Story of the Initial Coin Offering (ICO) Token Sale History,
NEWCONOMY (Oct. 13, 2018, 11:00 AM), https://perma.cc/SYD8-VCRE; COINGECKO, supra note
26.
31. Laura Shin, Here’s The Man Who Created ICOs And This Is The New Token He’s Backing,
FORBES (Sep. 21, 2017, 12:06 PM), https://perma.cc/QDM4-47V8.
32. Omni (OMNI), COINMARKETCAP (last visited Nov. 14, 2018)), https://perma.cc/9ZR4-
Q749.
33. See id.
34. See id.
35. See Danny Bradbury, MaidSafe COO Reflects on Lessons Learned from Crowdsale,
COINDESK (last updated Jun . 26, 2014, 17:52 UTC), https://perma.cc/Y3S6-DEA9 (describing
“crowdsale,” or initial coin offering, of MaidSafe).
36. See Nirupama Devi Bhaskar et al., Bitcoin IPO, ETF, and Crowdfunding, in HANDBOOK OF
Storj, a decentralized peer-to-peer file storage platform, closed their ICO in mid-
October 2014, raising just 910BTC, only 9% of its goal.37
Other ICO examples include GigaWatt, which raised $15M in token sale to es-
tablish a network for a more efficient collective Bitcoin mining, 38 and Gnosis, a
predictive marketing blockchain network coupled with artificial intelligence algo-
rithms, which sold 5% of its tokens in an ICO US$12M in just 10 minutes, for a total
valuation of approximately US$300M. 39 As of October 19, 2018, the market capi-
talization of Gnosis was approximately US$21M. 40
One of the largest ICOs to date is Tezos, a new cryptocurrency similar to
Ethereum with enhanced capabilities that raised over US$232M. 41 Tezos is a US-
based company that established a Swiss non-profit foundation through which the
ICO was held in July 2017. Possibly recognizing the looming specter of federal se-
curities regulation, Tezos sought to avoid regulatory requirements by creating a
non-profit foundation, claiming that purchases of Tezos coins were donations. Te-
zos has been hit with two class action lawsuits alleging, among other things, mis-
management, fraud, and the unauthorized sale of securities.42 Other class actions
have followed, all alleging violations of securities laws in their complaints, includ-
ing suits against GigaWatt (a decentralized hedge fund) and a crypto cannabis
startup. 43 These cases will be ones to watch carefully, as they have the potential to
shape the legal landscape for years to come. Notably, these cases are private actions
and not enforcement actions by the SEC.
The success of Ethereum, with its enhanced functionality and colored coin ca-
pabilities, has enabled the exponential proliferation of ICOs. The cryptocurrency
DIGITAL CURRENCY 529, 552 (David Lee Kuo Chuen ed., 2015); see also COINMARKETCAP, supra
note 32.
37. See id. at 553.
38. GigaWatt ICO Raises $15 Million to Let You Mine Bitcoin For $600 Through an Ethereum
Token, TRUSTNODES (Jul. 11, 2017, 4:57 PM), https://perma.cc/6FLR-ZTL4.
39. William Suberg, Fastest-Ever ICO: Ethereum-based Gnosis Creates $300 Mln in Minutes,
Raising $12 Mln, COINTELEGRAPH (Apr. 25, 2017), https://perma.cc/J9MF-ZUQ6.
40. All Cryptocurrencies, supra note 1.
41. Stan Higgins, $232 Million: Tezos Blockchain Project Finishes Record-Setting Token Sale,
COINDESK (updated Jul. 13, 2017, 1:08 PM UTC), https://perma.cc/7DGX-YZZ3.
42. See Stan Higgins, Tezos Founders Sued for Securities Fraud in Potential Class Action,
COINDESK (updated Nov. 5, 2017, 5:05 PM UTC), https://perma.cc/JW3V-YXQG; see also Aaron
Stanley, Tezos Founders Hit with Second Class Action Suit, COINDESK (updated Nov. 16, 2017, 12:38
PM UTC), https://perma.cc/N4JX-B8QW; In re Tezos Securities Litigation, No. 17-cv-06779-
RS (N.D. Cal. Aug. 7, 2018) (denying defendant’s motion to dismiss).
43. See Complaint, Stormsmedia, LLC v. Giga Watt, Inc., No. 17-438 (E.D. Wash. Jan. 19,
2018); Complaint, Hodges v. Monkey Capital, LLC, No. 17-81370 (S.D. Fla. Dec. 19, 2017); Com-
plaint, Davy v. Paragon Coin, Inc., No. 3:18-CV-00671 (N.D. Cal. Jan. 30, 2018)..
market has shown a high increase in daily trading volume. 44 It is arguable that the
proliferation of new tokens has changed their status from a technical protocol for
distributed networks to a vehicle for financial speculation. Regardless of what is
claimed in the network’s white paper, ICOs appear less about the utility of the to-
ken and more about raising money. As more cryptographic tokens are created and
continue to grow on an exponential basis, they rise and fall in value dramatically
and are traded openly on exchanges and in peer-to-peer environments. Accord-
ingly, cryptographic tokens are forming an entire asset class for alternative invest-
ments, with a large cross-section from which to choose.45
The success of ICOs to date for both company issuers and token buyers has
been mixed. The proliferation of ICOs has also led to a parallel growth in both
insufficiently developed business plans and, unfortunately, fraud and cybertheft.
“The presence of free-riders and fraudsters, however, does not imply a fundamental
weakness of the asset class; it stems from the sudden growth in the early stages of a
new market and from the presence of many unknowledgeable participants.” 46
These problems are not unique to the ICO market; they have existed throughout
the history of securities. The presence of fraud and weak businesses does not mean,
however, that a new financial product should be banned outright. Acknowledging
that ICOs do represent significant risk, it is still better for us to examine what the
current law requires in order to protect consumers from those risks and to give
companies a greater degree of regulatory certainty. Different jurisdictions have
taken different approaches, from the outright ban in China, to light touch regula-
tion and encouragement in the Isle of Man, to the DAO Report analytical frame-
work in the US, following a middle-of-the-road, case-by-case analysis for the fore-
seeable future.
While there is ongoing debate about whether altcoins should legitimately be
characterized as currencies or digital assets, they undisputedly represent an alter-
native investment with the evolution of their technological and financial value of
key importance. From the perspective of their owner, next to their usefulness as
media of exchange, their capabilities as stores of value are critical. “The emergence
of a broad cross-section of different coins has prompted the necessity to assess the
44. See HERMANN ELENDNER, ET. AL., THE CROSS-SECTION OF CRYPTO-CURRENCIES AS

FINANCIAL ASSETS: AN OVERVIEW 15 (2016) (observing the cryptocurrency market from March
30, 2014 to July 24, 2016).
45. See id. at 3.
46. Id.
risk and return profiles of hundreds of different assets, as well as considerations of

diversification and portfolio management.” 47
III. OVERVIEW OF US FEDERAL SECURITIES LAW – WHAT IS A SECURITY
The stock market crash of 1929 was precipitated in no small part by the expo-
nential growth in high volume, low quality securities investments with very limited
regulatory oversight. No longer were securities investments the province of a rel-
atively small cadre of highly sophisticated individual and institutional investors
who backed only high-quality projects. Joe Kennedy and Bernard Baruch report-
edly claimed that they knew the market was out of control when they began receiv-
ing stock tips from taxi drivers and shoeshine boys; it was a clear indication of a
market out of controland time to sell up and get out. 48 Unfortunately, the majority
of Americans were left holding the bag, and poverty and the Great Depression fol-
lowed. As a result, Congress enacted two statutes in relatively quick succession: the
Securities Act of 1933 (the “1933 Act”) and the Securities Exchange Act of 1934 (the
“1934 Act”). These statutes transformed securities markets by (1) creating a federal
agency to regulate the issuance and trading of securities; (2) establishing a disclo-
sure-based regulatory system, focused on the adequacy of information to investors;
and (3) providing enforcement mechanisms for the failure to comply with applica-
ble regulation and to penalize noncompliance and deter future wrongdoing, partic-
ularly fraud and misrepresentation. The 1933 Act regulates the issuance of securi-
ties while the 1934 Act regulates the trading of issued securities. The 1933 Act is of
primary concern for our analysis of digital tokens and their crowdsales.49
1933 ACT – SECTION 2: IS THERE A SECURITY?
Under the 1933 Act, all securities issued in the United States must either be
47. See id. at 11 (quoting YERMACK, supra note 22).

48. The story of the shoeshine boy and taxi driver is relevant to the current environment
surrounding ICOs, and many leaders in the traditional financial community, as well as early cryp-
tocurrency investors, have commented as such. See, e.g., John Rothchild, When the Shoeshine Boys
Talk Stocks It Was a Great Sell Signal in 1929. So What Are the Shoeshine Boys Talking About Now?,
FORBES (Apr. 15, 1996), https://perma.cc/DJ3Z-EM4L.
49. State securities laws, also referred to as “Blue Sky Laws,” see James Chen, Blue Sky Laws,
INVESTOPEDIA (Nov. 15, 2017), https://perma.cc/4EGG-R4AY, are not addressed or analyzed in
this paper. Any practical, real-world issue of securities in the United States, however, would not
be complete without a full analysis of the requirements of these laws and regulations.
registered with the SEC or fall under an exemption: either a class of securities ex-
emption or a transactional exemption. 50 The first stage in the registration analysis
is to determine whether there is a security to be offered.
The 1933 Act, §2(a)(1) defines a security as follows:
The term “security” means any note, stock, treasury stock, security fu-
ture, security-based swap, 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,
certificate of deposit, or group or index of securities (including any in-
terest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national securities exchange relat-
ing to foreign currency, or, in general, any interest or instrument com-
monly known as a “security”, or any certificate of interest or participa-
tion in, temporary or interim certificate for, receipt for, guarantee of, or
warrant or right to subscribe to or purchase, any of the foregoing.51 (Em-
phasis added).
In short, a security is an interest in a corporation or other legal entity with cer-

tain rights such as voting, ownership, cash flows, assets, statutory or contractual
rights, corporate governance rights, and the expectation of profit. Stocks, bonds,
commercial debt, futures, derivatives, and the list of traditional characters populate
this list. If a security exists, it must be registered with the SEC pursuant to §5 of the
1933 Act or fall under a registration exemption. Exemptions can include types of
securities such as government bonds or types of transactions such as private sales
to accredited investors. 52 In our digital token analysis, it is the concept of an invest-
ment contract on which the SEC has staked its jurisdictional claim and therefore
requires our scrutiny.
INVESTMENT CONTRACTS AND THE HOWEY TEST
A catch-all category of securities, the investment contract received clarity
50. 15 U.S.C. §§ 77c-d (2017).

51. 15 U.S.C. § 77b(a)(1) (2017).
52. 15 U.S.C. §§ 77c(a), 77d(a)(2) (2017).
through the Supreme Court’s opinion in the seminal case of Securities and Exchange
Commission v. W.J. Howey Co.53
Howey concerned the sale of real estate contracts in Florida citrus groves. 54
Under company’s the business model, Howey sold sections of the orange groves
and the purchasers leased the land back to Howey, whose company would farm the
land and market the produce on behalf of the purchasers. Purchasers would share
in the revenue. Most purchasers had no experience in agriculture and none would
tend to the land themselves. Howey did not file a statement to register these con-
tracts as securities and the SEC intervened. In the final decision, the Supreme Court
held that these sale-leaseback arrangements were investment contracts under
§(2)(a)(1) of the 1933 Act. In doing so, the Court established the test for determining
the existence of an investment contract. 55 There are four criteria to this test:
(1) An investment of money;

(2) In a common enterprise;
(3) With the expectation of profits;
(4) Solely from the efforts of others. 56
This jurisprudence of this case remains generally unchanged in over seventy

years and is known among securities law practitioners as “The Howey test.” We will
take a further look at each of these criteria as applied to digital tokens by the SEC
and the courts in the next sections.
IV. THE HOWEY TEST, THE SEC, AND THE DAO 21A REPORT
“The DAO,” which stands for Decentralized Autonomous Organization, was

intended to be just that: a virtual company run by algorithms and smart contracts
executed on a blockchain, rather than by the active decisions of human beings. The
DAO was conceived as a virtual company and an investment vehicle. As stated in
the SEC’s report on the company,
The DAO was created by [blockchain software company] Slock.it and Slock.it’s
co-founders, with the objective of operating as a for-profit entity that would create
and hold a corpus of assets through the sale of DAO Tokens to investors, which
53. 328 U.S. 293 (1946).

54. Id. at 294-95.
55. Id. at 301.
56. Id.
assets would then be used to fund “projects.” The holders of DAO Tokens stood to
share in the anticipated earnings from these projects as a return on their investment
in DAO Tokens. In addition, DAO Token holders could monetize their investments
in DAO Tokens by re-selling DAO Tokens on a number of web-based platforms
(“Platforms”) that supported secondary trading in the DAO Tokens.57
The DAO raised approximately US$150 million in an ICO of Ether-based to-
kens. 58 After the tokens were sold, The DAO was to begin funding projects for in-
vestment. 59 Token holders were not restricted from resale of their tokens, which
were freely traded on cryptocurrency exchanges (in effect, secondary market trad-
ing platforms).60 Unfortunately, The DAO was hacked and approximately one third
of its funds were stolen. 61 These funds were later refunded to investors through a
technical work-around called a “hard-fork” in the blockchain.62 As the largest to-
ken sale at the time, coupled with the hack, the DAO received significant attention
in the press, and eventually, the attention of the SEC. 63
The SEC’s investigation into The DAO addressed the fundamental question of
whether the tokens sold should be classified as securities. 64 The SEC directly ap-
plied the Howey test to the DAO Tokens in its 21A report, determining that they
were, in fact, securities that should have been registered under section 5 of the 1933
Act. 65 Let us examine the four factors of the Howey test under the SEC’s analysis of
The DAO.
(1) DAO tokens involved the investment of money. DAO investors purchased
tokens with fiat currency and other cryptocurrencies. Citing to Uselton v. Comm.
Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991), the SEC affirmed
that an investment of money need not be limited to cash and extended the definition
of money to cryptocurrencies. 66
(2) The DAO was a common enterprise. This is clear from the facts and the SEC
felt no need to address this point in its report.
57. See U.S. SECURITIES AND EXCHANGE COMMISSION, supra note 5, at 1.

58. See The DAO (organization), WIKIPEDIA, https://perma.cc/C8RT-NYKW (archived Nov.
11, 2018).
59. Id.
60. Id.
61. Id.
62. Id.
63. Id.
65. See id.
66. Id. at 11.
(3) DAO token-holders had a reasonable expectation of profits. The DAO was a
commercial, for-profit venture. Citing to SEC v. Edwards, 540 U.S. 389, 394 (2004),
the SEC noted that profits can include the increase in value. The stated purpose of
The DAO was to fund projects in exchange for a return on investment.
(4) DAO profits would be derived from the efforts of others. Although DAO token-
holders had a direct vote and therefore a voice in what investments should be pur-
sued and to what extent, the SEC held that such token-holders did not have a gen-
uine say in the running of the virtual business. The SEC said that token-holders had
to rely almost exclusively on the expertise of the Slock.it founders, who were, in
fact, actively overseeing this so-called autonomous organization and choosing in-
vestment vehicles for token-holder consideration. Therefore, any profits received
were derived not from the efforts of the 11,000 or so individual investors, but from
the DAO founders, who were, in fact, managing the company. 67 In so holding, the
SEC effectively questioned the importance of voting rights at all in a blockchain
network enterprise. After all, common stock securities generally have voting rights
but remain securities regardless.
In reaching its conclusion, the SEC stressed that “the U.S. federal securities law
may apply to various activities, including distributed ledger technology, depending
on the particular facts and circumstances, without regard to the form of the organ-
ization or technology used to effectuate a particular offer or sale.” 68 In other words,
merely using new technology does not exempt financial offerings or products from
securities regulation in the United States. If the asset in question resembles a secu-
rity pursuant to the statute or established case law, then it is, regardless, a security.
Simply put, if a digital token is a security, its sale must be registered unless it falls
within an established exemption under the 1933 Act or SEC Rules. However, not
all tokens or token sales may involve securities and therefore the SEC appears de-
termined to take a case-by-case approach.
The SEC also notes that the Howey test is a flexible test, “one that is capable of
adaptation to meet the countless and variable schemes devised by those who seek
the use of the money of others on the promise of profits.” 69
It is important to note that the SEC chose not to refer the matter for enforce-
ment or prosecution. Rather, it put the entire digital token community on notice
67. See id. at 12-14.

68. Id. at 10.
69. Id. at 11 (quoting Howey, 328 U.S. at 299).
that failure to heed the principles stated in the report may lead to enforcement ac-
tions.
It is also important to note how the cryptocurrency market reacted on the re-
lease of the DAO Report. Cryptocurrency values dropped significantly but re-
bounded within the week. The price of Bitcoin as of January 10, 2018 was nearly
five and a half times greater than its price on the date the DAO Report was re-
leased. 70 Ethereum was similarly up by a factor of 5.7 over the same period. 71 In-
terest in cryptocurrencies and new ICOs appears undaunted. 72
According to press reports, following the release of the DAO Report, the SEC
contacted several enterprises on their token sales to warn them about possible vio-
lations.73 “Protostarr” is one such start-up contacted by the SEC, and subsequently
shut down their ICO and refunded investor money.74 By contrast, a different start-
up, the advertising platform “Benjacoin” contacted the SEC and sent a No Action
Request Letter 75, after posting about their interaction with SEC staff on its corpo-
rate blog. 76 The company proceeded with their ICO, asserting their token to be a
“utility” and not a security. No further action appears to have been taken as of the
date of this article.
Publicly, SEC leadership has been highly critical of ICOs, asserting that the fi-
nancial mechanism is ripe for scam artists. In September 2017, Steven Peikin, Co-
Director of the Enforcement Division compared those seeking to leverage the
70. See Bitcoin (BTC), COINMARKETCAP, https://perma.cc/2LL3-Q6XW (archived Dec. 19,

2018) (compare price between January 10, 2018 and July 25, 2017).
71. See Ethereum (ETH), COINMARKETCAP, https://perma.cc/7TQ7-2SMV (archived Dec.
19, 2018). Note that the cryptocurrency market remains highly volatile. By the time this article
is published, the price of both Ether and Bitcoin may go up or down significantly.
72. See Nathanial Popper, Despite S.E.C. Warnings, Wave of Initial Coin Offerings Grows, N.Y.
TIMES (Aug. 7, 2017), https://perma.cc/UH4G-9MWF.
73. See Laura Shin, After Contact By SEC, Protostarr Token Shuts Down Post-ICO, Will Refund
Investors, FORBES (Sept. 1, 2017), https://perma.cc/3KHD-8AZM.
74. See id.
75. “An individual or entity who is not certain whether a particular product, service, or
action would constitute a violation of the federal securities law may request a “‘no-action”‘ letter
from the SEC staff. Most no-action letters describe the request, analyze the particular facts and
circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for
no action, concludes that the SEC staff would not recommend that the Commission take enforce-
ment action against the requester based on the facts and representations described in the individ-
ual’s or entity’s request. The SEC staff sometimes responds in the form of an interpretive letter
to requests for clarifications of certain rules and regulations.” No Action Letters, U.S. SECURITIES
AND EXCHANGE COMMISSION (last modified Mar. 23, 2017), https://perma.cc/7LL4-UY74 [here-
inafter SEC, No Action Letters].
76. See Release: Benja Responds to SEC Initial Coin Offering Investigation, BENJA (July 26, 2017),
https://perma.cc/Q6L5-FYJH.
blockchain use case improperly to roaches. 77 Newly minted SEC Chairman, Jay
Clayton, referenced ICOs in remarks on cyber-fraud risks to the investing public. 78
One week prior to these remarks, the SEC suspended trading of securities in three
blockchain-related companies.79 These suspensions, while limited in duration, in-
dicate that the SEC wants to ensure the sufficiency of disclosures made to investors
by blockchain startups intending to hold an ICO.
Following these actions and remarks, the SEC created a new Cyber Unit in the
Enforcement Division, with broad mandate to address cyber-related misconduct,
including, expressly, ICOs and digital token sales.80 Within days, the new unit
brought charges against two ICOs, one involving investments in real estate (“RE-
Coin”) and diamonds (“DRC World”) for fraud and the unregistered sale of securi-
ties. 81 Fraud and investor protection appear to be the main focus of this unit on the
ICO front, and more, similar investigations and charges are likely to follow. In a
speech on October 26, 2017, Stephanie Avakian, Co-Director of the Division of En-
forcement and the new Cyber Unit, said,
Blockchain technology presents many interesting issues and can of

course present legitimate opportunities for raising capital. But, like
many legitimate ways of raising capital, the popular appeal of virtual cur-
rency and blockchain technology can be an attractive vehicle for fraud-
ulent conduct. We think that creating a permanent structure for the con-
sideration of these issues within the Cyber Unit will ensure continued
focus on protecting both investors and market integrity in this space.82
77. Rachel Rose O’Leary, ‘Roaches’: SEC Chief Speaks Out Against Malicious ICOs,
COINDESK (Sept. 6, 2017), https://perma.cc/9HLU-98E5 (archived Nov. 14, 2018).
78. John McCrank, SEC Chief Says Cyber Crime Risks Are Substantial, Systemic, REUTERS
(Sept. 5, 2017), https://perma.cc/PNN3-Y6KP (archived Nov. 14, 2018).
79. See SEC Suspends Trading in Securities of Three Blockchain-Related Companies, REED SMITH
(Aug. 29, 2017), https://perma.cc/85KH-R9FN (archived Nov. 14, 2018).
80. Press Release, U.S. Securities and Exchange Commission, SEC Announces Enforce-
ment Initiatives to Combat Cyber-Based Threats and Protect Retail Investors (Sept. 25, 2017),
https://perma.cc/4GPW-KEB4.
81. Press Release, U.S. Securities and Exchange Commission, SEC Exposes Two Initial
Coin Offerings Purportedly Backed by Real Estate and Diamonds, (Sept. 29, 2017),
https://perma.cc/UQZ5-QWSH (claiming in its allegations both ICOs are outright fraud, with
neither scheme having retained staff, let alone started the build of a network or the digital tokens
to support it).
82. Stephanie Avakian, The SEC Enforcement Division’s Initiatives Regarding Retail Investor
Protection and Cybersecurity, U.S. SECURITIES AND EXCHANGE COMMISSION (Oct. 26, 2017),
https://perma.cc/5H7U-65AX.
Chairman Clayton has been more aggressive in his remarks. On November 9,

2017, in an unscripted remark in the middle of a speech at the Institute for Securi-
ties Regulation in New York City, he said, “I have yet to see an ICO that doesn’t
have a sufficient number of hallmarks of a security,” indicating a potentially more
aggressive stance on digital token sales will follow.83
The Cyber Unit kicked off by pursuing two notable, well publicized actions
against ICOs. The first action was against Canadian company PlexCorps and its
founders, described as “recidivist” securities violators, who raised US$15M from
US, Canadian, and other investors in an ICO while promising thirteen-fold returns
in less than a month.84 Legal action was filed by the SEC in Federal District Court
in Brooklyn against PlexCorps alleging violations of the registration requirements
of section 5 of the 1933 Act and the anti-fraud provisions of section 10b of the 1934
Securities Exchange Act.85 The second action of note was a cease-and-desist order
taken against Munchee, a California-based company, which, as a result, agreed to
refund all funds raised in its own ICO.86 In an administrative proceeding before the
SEC, Munchee tokens, ostensibly for a restaurant review network, were found to
be investment contracts under Howey and therefore securities; as Munchee did not
register the tokens or assert an exemption, the administrative court held the ICO to
be in violation of section 5 of the 1933 Act. 87 These actions demonstrate the SEC’s
intent to pursue not only fraudulent schemes, but also registration requirement vi-
olations that fail the Howey test, even where no fraud is alleged, and the likely ap-
proach to each scenario.
Official statements from the SEC confirm their intent to follow the case-by-
case approach and application of the Howey test to ICO token sales going forward.
Remarks by William Hinman, Director of the SEC Division of Corporate Finance
clearly indicate that investor expectation and the economic realities of the tokens
in question would be central to its analysis under the framework set forth in the
83. Dave Michaels & Paul Vigna, SEC Chief Fires Warning Shots Against Coin Offerings, WALL
ST. J (Nov. 9, 2017 5:31 PM EST), https://perma.cc/2VZC-D94Z.
84. Press Release, SEC Emergency Action Halts ICO Scam (Dec. 4, 2017),
https://perma.cc/K7BL-CH38; see also Michelle Price, U.S. SEC’s Cyber Unit Files Charges in Al-
leged Initial Coin Offering Fraud, WALL ST. J (Dec. 4, 2017 9:36 AM), https://perma.cc/3HBY-
9LNB.
85. See id.; see also 15 U.S.C. § 78j(b); Complaint at 29, 31, S.E.C. v. PlexCorps, No. CV 17-
7007 (E.D.N.Y. Dec. 1, 2017).
86. Stan Higgins, SEC Halts Multimillion-Dollar ‘Munchee’ ICO for Securities Violations,
COINDESK (Dec. 11, 2017), https://perma.cc/VUJ6-US72.
87. See id.; see also Munchee Inc., Securities Act of 1933 Release No. 10445 (Dec. 11, 2017).
DAO Report.88 In Director Hinman’s own words, “. . . the economic substance of

the transaction always determines the legal analysis, not the labels.” 89 Significantly,
in his remarks Hinman acknowledged that there may be circumstances when ICO
tokens are not securities, based on contractual or technical structuring methods so
that they function more like a consumer item.90 At the Georgetown FinTech Con-
ference, Mr. Hinman further indicated that the SEC would release “plain English”
guidance for ICO entrepreneurs. 91 Chairman Clayton’s testimony before Congress
further confirmed the case-by-case approach.92 As of the date of this article, no an-
swers to “No Action Request” letters have been published by the Commission that
would provide additional guidance. Formal rulemaking proceedings on digital to-
kens seem unlikely in the near future in this author’s opinion.
Despite this case-by-case approach, the Cyber Unit appears to be conducting
an aggressive investigation, issuing dozens of subpoenas and information requests
to crypto startups for information on ICO sale and pre-sale structures. 93 It is to be
expected that more enforcement actions will result, as the SEC strives to rein in the
market, make public examples of wrongdoers, and assert its jurisdiction unequivo-
cally. A salient example is the case against Maksim Zaslavskiy brought by the SEC
in the Eastern District of New York.94 Zaslavskiy created two crypto ventures, one
focused on real estate, the other a diamond-backed cryptocurrency, and held two
ICOs accordingly.95 The U.S. Attorney and the SEC brought filed a criminal com-
plaint against Zaslavskiy and co-conspirators for materially false and fraudulent
88. See Director, Division of Corporate Finance, SEC, William Hinman, Digital Asset Trans-
actions: When Howey Met Gary (Plastic), Remarks at the Yahoo Finance All Markets Summit: Crypto
(Jun. 14, 2018), https://perma.cc/253D-Q4TE (archived Nov. 18, 2018).
89. Id.
90. See id.
91. See SEC Plans ‘Plain English’ Crypto Securities Guide, BLOOMBERG LAW (Nov. 5, 2018
11:26 AM), https://perma.cc/PV5M-Z2UW (archived Nov. 18, 2018) (The author was in attend-
ance at the conference during which Mr. Hinman made these remarks).
92. United States. Cong. House. Committee on Financial Services, Hearing on “Oversight of
the U.S. Securities and Exchange Commission”, 115th Cong. (2d Sess. 2018) (Statement of Jay Clay-
ton, Chairman, SEC) (retrieved on Oct. 30, 2018), https://perma.cc/8B9F-EJT4 (archived on Nov.
18, 2018) (“determining what falls within the ambit of a securities offer and sale is a facts-and-
circumstances analysis, utilizing a principles-based framework that has served American compa-
nies and American investors well through periods of innovation and change for over 80 years”).
93. See Jean Eaglesham & Paul Vigna, Cryptocurrency Firms Targeted in SEC Probe, WALL ST.
J (Feb. 28, 2018 6:47 PM EST), https://perma.cc/XAR8-DH9Y (archived Oct. 25, 2018).
94. Complaint at 1, United States v. Zaslavskiy, No. 17-CR-0647, 2018 WL 4346339
(E.D.N.Y. Sept. 11, 2018).
95. United States v. Zaslavskiy, No. 17-CR-0647, 2018 WL 4346339, at *2 (E.D.N.Y Sept.
11, 2018).
misrepresentations in violation of the Securities Act. 96 In denying the defendant’s

motion to dismiss, the district judge held that a reasonable jury could conclude that
the facts alleged in the indictment could satisfy the Howey test. 97 Both ICO white
papers expressly claimed the likelihood of high returns such that if the facts hold, a
reasonable jury could conclude not only that the Howey test factors had been satis-
fied, but also that the primary motivation for purchasing the tokens was investment
and therefore expectation of profits.98 Defendant Zaslavskiy pleaded guilty on No-
vember 15, 2018 and faces up to 37 months in prison. 99
V. WHEN ARE DIGITAL TOKENS SECURITIES? – THE HOWEY ANALYSIS
An important hallmark of the DAO Report is the SEC’s commitment to a fact-

specific, case-by-case analysis of each ICO, based on the Howey test and the eco-
nomic realities of each token sale. With few cases and enforcement actions to re-
view at this time, it is useful to examine the courts’ interpretation of Howey over
seventy years, and the fact patterns of significant cases that may be relevant to dig-
ital tokens and blockchain networks.
(1) INVESTMENT OF MONEY
One element of the Howey test is the investment of money. Many purchasers
of digital tokens use Bitcoin, Ether, or similar cryptocurrencies rather than fiat cur-
rency. This does not avoid the condition of the test regarding an investment of
money. Jurisprudence is quite clear that an investment of money is not limited to
currency, but may also include assets, goods, notes, and other forms of considera-
tion.100 In International Brotherhood of Teamsters v. Daniel, for example, the court
held that an employer’s compulsory pension plan, into which individual employees
made no financial contributions, still amounted to an investment of money, because
96. See id.

97. See id. at *4.
98. See id. at *3. (noting that the defendants never purchased any assets behind their pro-
posed business plans, real estate or diamonds).
99. Patricia Hurtado, First Initial Coin Offering Fraud Case Ends in Guilty Plea, Bloomberg
(Nov. 15, 2018, 5:17 PM EST), https://perma.cc/ZF5F-ACQA.
100. See, e.g., Int’l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 560 n.12 (1979); see also Coin-
base et. al., A Securities Law Framework for Blockchain Tokens, (2016), https://www.coin-
base.com/legal/securities-law-framework.pdf.
they had provided their labor to the employer in exchange for a compensation pack-
age which included pension benefits. 101
Another relevant example can be found in Tcherepnin v. Knight. 102 In Tcherep-
nin, the Supreme Court held withdrawable capital shares in a savings in loan to be
investment contracts and therefore securities, where the savings of individuals con-
stituted the investment of money which formed the basis for the money lending
enterprise of an Illinois savings and loan association.103
Greater clarity, still, is found in Majors v. South Carolina Securities Commis-
sion.104
The Majors court held that an investment of money under Howey means
that an investor must have committed assets to the enterprise in such a manner as
to subject himself to financial loss.105 Token purchasers, whether using cash,
Bitcoin and other cryptocurrencies, or providing an exchange of services, are ex-
posing themselves to financial loss through their purchase. Tokens are not neither
fiat currencies nor are they government backed financial products. Accordingly,
from established case law and due to the flexible interpretation of the elements of
the Howey test, it would seem that purchases of new digital tokens, by means other
than fiat currencies, would still qualify as an investment of money.
(2) COMMON ENTERPRISE
In the DAO Report, the SEC did not address this element of the Howey test,
other than in passing, and then only to make a declarative statement that token pur-
chasers were investing in a common enterprise. 106 The focus of the common en-
terprise element is tied to a pooling of funds in contemplation of the expectation of
profits, which is addressed in the next section.
In Continental Marketing Corp., the court found that Continental was engaged
in a common enterprise, the very heart of which was a chance to invest money
through multiple contracts amounting in reality to an “investment contract” within
the meaning of the applicable statute. 107 The Continental court further stated that
101. See Int’l Bhd. of Teamsters, 439 U.S. at 559-560 (holding that despite the satisfaction of
the first prong of the Howey test, the pension plan is not a security).
102. Tcherepnin v. Knight, 389 U.S. 332 (1967).
103. See id. at 338-340.
104. Majors v. S.C. Sec. Comm’n, 644 S.E.2d 710 (S.C. 2007).
105. Id. at 716; see also Hector v. Wiens, 533 F.2d 429, 432 (9th Cir. 1976); SEC v. Pinckney,
923 F. Supp. 76, 80 (E.D.N.C. 1996).
106. U.S. SECURITIES AND EXCHANGE COMMISSION, supra note 5, at 11.
107. Continental Marketing Corp. v. SEC, 387 F.2d 466, 469 (10th Cir. 1967).
the element of control was not essential to the finding of a common enterprise; ra-
ther, emphasis should be placed on the economic realities of the venture and the
nature of the investor’s participation in said enterprise. 108 Specifically, the court
said, “If [the investor’s participation] is one of providing capital with the hopes of a
favorable return then it begins to take on the appearance of an investment contract
notwithstanding the fact that there may be more than one party or other than a
principal party and his agent on the other end of the transaction or transactions.” 109
It would seem, then, that unless the underlying network for which the ICO is being
held is purely a non-profit, open-source project, the common enterprise element is
easily met. 110
(3) (A) WHEN THE TOKEN DOES NOT YET EXIST – PRE-TOKEN SALES AND THE
EXPECTATION OF PROFIT VS. RISK CAPITAL
What happens when a person buys the right to use digital tokens on a network
that has not yet been launched? At the time of purchase, there is no operating net-
work and there are no digital tokens. The purchaser is buying the right to use these
tokens in the future, for whatever stated purpose the network has been created to
fulfill. Is the purchase of a future token, even a token that once launched can only
be used within its established network, a security under the Howey test?
An analogous situation can be found in the case of Silver Hills Country Club v.
Sobieski.111 Silver Hills involved the sale of memberships at a discount to a country
club under construction. Members would still be required to pay annual dues and
pursuant to the bylaws, had no right to the income or assets of the club. Member-
ships would be transferable, with board approval as a prerequisite. The court con-
cluded that the sale of these memberships were securities, stating as follows:
Petitioners are soliciting the risk capital with which to develop a business for
108. Id. at 470.

109. Id.
110. Cases in other federal and state courts have reached the same conclusion. Courts have
held that the common enterprise element of the Howey test could be satisfied where an investor
purchased a share in a common investment fund, the investment depended on the efforts of a
promoter, or third party managerial efforts affected the fortunes of the enterprise. See, e.g., SEC
v. Brigadoon Scotch Distributors, Ltd. 388 F. Supp. 1288, 1291-92 (S.D.N.Y. 1975); SEC v. Glen
Turner Enterprises, Inc. 474 F2d 476, 482 (9th Cir ) , cert. denied, 414 U.S. 821, 94 S. Ct. 117, 38
L. Ed. 2d 53 (1973).See also John F. Wagner Jr., ”“Common Enterprise” Element of Howey Test to
Determine Existence of Investment Contract Regulable as “Security” Within Meaning of Federal Secu-
rities Act of 1933 (15 U.S.C.A. § 77a et seq.) and Securities Exchange Act of 1934 (15 U.S.C.A. § 78a et
seq.), 90 A.L.R. Fed. 825, at § 6 (1988).
111. See Silver Hills Country Club v. Sobieski, 361 P.2d 906 (Cal. 1961).
profit. The purchaser’s risk is not lessened merely because the interest he purchases
is labelled a membership. Only because he risks his capital along with other pur-
chasers can there be any chance that the benefits of club membership will material-
ize. 112
As the above quote suggests, this theory under the investment contract test is
known as the risk capital test. While not universally accepted across the courts, 113
it provides useful guidance where the four defined prongs of the Howey test fall
short in performing the investment contract analysis. It is also useful to note the
Hawaii Market Center case, in which the Hawaii Supreme Court held that “founder-
member purchasing contract agreements” whereby individuals purchased
cookware or sewing machines at a significant premium for the right to become dis-
tributors constituted the sale of unregistered securities. 114
Like the country club, most blockchain startups offering ICOs are selling to-
kens for networks that have not yet been built. Following the reasoning of Silver
Hills and comparable cases, pre-sales of tokens are likely to be viewed as securi-
ties. 115 Many start-ups are wising up to this reality and consulting with legal coun-
sel on structuring their ICOs, employing new model agreements such as the Simple
Agreement for Future Tokens, or “SAFT,” which addresses the security element of
the sale. I will address the SAFT in further detail in the following section on best
practices to follow in an ICO.
(3) (B) EXPECTATION OF PROFIT: INTENT TO USE V. INTENT TO PROFIT
Let us take the next stage of the scenario. The network has been built, at least
on a basic level, and tokens have some functional use. Whether the sale of the to-
kens constitutes a security under Howey will depend in large part on making an
“economic reality” assessment with regard to their purpose. 116 Is it usable solely
within the network environment for which it is created, or is it fungible and trada-
ble such that its value may increase with the growth or success of the enterprise?
112. Id. at 908.

113. See, e.g., Sec. Adm’r v. Coll. Assistance Plan (Guam) Inc., 533 F. Supp. 118, 123 (D. Guam
1981) (rejecting the risk capital test, because it is unsettled whether it applies only to start-up
capital or whether it also extends to subsequent financing rounds, in the sale of educational fund-
ing plans).
114. See State v. Hawaii Market Center, Inc., 485 P.2d 105, 109-110 (Haw. 1971).
115. See also, Jet Set Travel Club v. Corp. Comm’r of Or., 535 P.2d 109, 112 (Or. Ct. App.
1975) (holding that the sale in travel club memberships were securities because the benefits of
membership had not been realized at the time of the sale).
116. See SEC v. Howey, 328 U.S. 293, 298 (1946).
Leaving the world of digital tokens for a moment, we turn to the “kickstarter”
concept. 117 Kickstarter and similar platforms offer creators the opportunity to pre-
sell their goods, such as books, art, games, and tickets to films or plays to be pro-
duced. In general, such products are not securities, and would not pass the Howey
test or fit within any of the statutory definitions. One merely pre-purchases a phys-
ical object, or a ticket to an event. These items can be resold free of restrictions on
platforms like eBay, yet this does not grant them security status, as the general mo-
tivation for purchase is not investment but rather use and enjoyment. This is a non-
security crowdfunding platform. In contrast, start-up enterprises wishing to raise
general capital may sell securities to the public through an SEC-registered crowd-
funding platform, under the rules established by the JOBS Act in Regulation A and
Regulation Crowdfunding.118 The amounts that can be raised under these offerings
is much smaller than the amounts ICO issuers hope to receive to fund their projects
and new companies.
Howey itself provides a good example. Investors were purchasing interests in
orange groves, where the oranges to be cultivated were not for personal use but for
resale and profit.119 Another example can be found in the SEC case against MA
Lundy Associates.120 In this case, the defendants sold receipts in scotch whiskey
barrels. 121 The defendants contended that the purchase of raw whiskey was not a
common enterprise as purchasers could do what they wanted with the barrels. De-
spite their protestations, the barrels clearly were not intended for to be personally
held by receipt purchasers, but rather aged in a warehouse and sold at a point in
time in the future at a profit. Applying Howey, the court found that the project did
indeed involve an investment of money in a common enterprise with a reasonable
expectation of profits derived from the efforts of others and had marketed the pro-
ject to the public as such. 122 Emphasizing the economic realities of the project, the
court cited to established case law under Howey in reaching its decision:
The more critical factor is the nature of the investor’s participation in the
enterprise. If it is one of providing capital with the hopes of a favorable
117. See, e.g., KICKSTARTER, https://perma.cc/97CH-B46U (archived Dec. 19, 2018), for ex-
amples of the projects discussed in this paragraph.
118. See Regulation A, 17 C.F.R. § 230.251 et seq. (2016); see also Regulation Crowdfunding,
17 C.F.R. §227.100 et seq. (2017).
119. See Howey, 328 U.S. at 295.
120. SEC v. M.A. Lundy Assocs., 362 F. Supp. 226 (D.R.I. 1973).
121. Id. at 229.
122. Id. at 237.
return then it begins to take on the appearance of an investment contract

notwithstanding the fact that there may be more than one party or other
than a principal party and his agent on the other end of the transaction or
transactions.123
Accordingly, the court rightly found that the whiskey project was an unregis-
tered sale of securities in violation of § 5 of the 1933 Act.
Contrast this case with cases involving the sales of an interest in residential
properties intended for occupancy. In United Housing v. Forman, tenants of a mas-
sive New York City housing cooperative brought suit against the owners alleging
securities fraud and the sale of unregistered securities, among other claims.124 Right
of occupancy in the co-op apartments required the purchase of a number of shares
in the co-op which were expressly called “stock.” 125 No rights were conferred to
the stock owners, other than occupancy; under the lease terms, stock could not be
sold for more than their purchase price plus a fraction of the mortgage amortization
paid during tenancy. 126 Despite being labeled as stock, the US Supreme Court held
that such shares were not securities and did not meet the conditions of Howey. Writ-
ing for the majority, Justice Powell stated that, when viewed in terms of their sub-
stance (the economic realities of the transaction) rather than their form, the instru-
ments involved here were not shares of stock in the ordinary sense and conferred
none of the normal rights associated with stock or other securities. 127 Following
this logic, digital tokens sold for use in established networks that only have utility
within those networks, such as loyalty points, game tokens, and the like, might ap-
pear less likely to be considered securities.
SEC Chairman Clayton appears to take a contrary view, casting a dark shadow
over the concept of a utility token. In an official statement, Chairman Clayton
stated,
Merely calling a token a “utility” token or structuring it to provide some utility
does not prevent the token from being a security. Tokens and offerings that incor-
porate features and marketing efforts that emphasize the potential for profits based
123. Id. at 238 (quoting Cont’l Mktg. Corp. v. SEC, 387 F.2d 466 (10th Cir. 1967) (referring
directly to Howey in making this statement).
124. See United Hous. Found., Inc. v. Forman, 421 U.S. 837, 837 (1975).
125. Id.
126. Id. at 843.
127. See id. at 838.
on the entrepreneurial or managerial efforts of others continue to contain the hall-

marks of a security under U.S. law.128
History ultimately will decide whether the courts will follow Forman or Clay-
ton in assessing whether token purchases are motivated by the desire to build and
use a product or to generate investment profits. Yet we do have indications to aid
our analysis under this scenario in both the above case law and recent SEC public
statements. If the motivation is focused more on investment, speculation, and cre-
ating a secondary market for token sales, rather than functional token use or “util-
ity,” it is likely that the token will be considered a security and subject to regulation.
If the functional token sale is intended to build a market for the product and de-
velop network participation, or in other words, to get people to use the tokens and
thereby grow the network and demand for the digital products, it is less likely to be
considered a security, taking on “kickstarter-like” characteristics. Whether the to-
kens appreciate in value due to scarcity, thus encouraging peer-to-peer, eBay-like
trading, in and of itself should not affect this analysis. Whether the ICO is capped
at a number of tokens or a dollar value may also have an impact on this analysis.
Does the company really need $200M to build a blockchain network? The charac-
teristics of the sale are as important as the underlying motivation. This gets us to a
central question every entrepreneur must answer honestly—what is the motivation
for holding a token sale and how central is the token (and blockchain itself) to the
design and use of the company’s products?
Regardless, in and of itself, this analysis is still no guarantee that a company
that actively lists usage tokens on a secondary market could not inadvertently find
them considered as securities in the eyes of the law. Take the case of Gary Plastic
Packaging Corporation v. Merrill Lynch. 129 Gary Plastics purchased certificates of de-
posit (“CD”) from Merrill Lynch in the amount of US $1.2M. Merrill Lynch created
a secondary market for these CDs. Conventional CDs are not considered securi-
ties. 130 However, by creating a secondary market for their CD product, Merrill
Lynch was engaged in a “common enterprise” and therefore converted these basic
financial instruments into securities pursuant to the Howey test. 131 Furthermore,
investors like Gary Plastics derived their profits not so much from the interest rates
128. Jay Clayton, Public Statement: Statement on Cryptocurrencies and Initial Coin Offerings
(Dec. 11, 2017), https://perma.cc/GGW8-ZKZM.
129. See Gary Plastic Packaging Corp. v. Merrill Lynch, 756 F.2d 230, 230 (2d Cir. 1985).
130. See id. at 239-240 (citing Marine Bank v. Weaver, 455 U.S. 551, 560 (1982)).
131. See id. at 240.
but from the active efforts of Merrill Lynch. 132 Accordingly, digital token issuers
must beware. Your token, in and of itself and based on its usage, may not constitute
a security, but actively listing those tokens on an exchange creates a secondary mar-
ket which may reverse the classification in the eyes of the SEC. Note also that in the
DAO Report, the SEC expressly states that secondary market trading platforms
constitute securities exchanges and must also be registered with the SEC under ap-
plicable rules. 133
(4) THE EFFORTS OF OTHERS
Most courts do not appear to take the “solely from the efforts of others” ele-
ment of the Howey test literally, focusing instead on the degree of managerial con-
trol over an enterprise. 134 Within the context of a blockchain network, the primary
factor to consider when determining the degree of managerial control seems to be
the extent to which token-holders participate in the development and design of the
network and in the core decisions of the enterprise. Simply put, the central question
is how much control the investors retain. The greater the control, the less likely you
are to have an investment contract.
An important case pertaining to this question is ETS Payphones.135 Here, a pro-
moter sold payphones to investors who leased them back for a monthly fee; the 11th
Circuit Court of Appeals affirmed the district court finding that the arrangements
were likely investment contracts. 136 In addressing the “efforts of others” element
of the Howey test, the court stated that, “the more control investors retain, the less
likely it becomes that the contract qualifies as a security.” 137 In this case, the ETS
investors had retained minimal control over the telephones, and relied on ETS for
profits. 138
In the case of The DAO, the SEC determined that token-holders’ rights to vote
on investment decisions were insufficient to establish that they had direction and
control over the direction of the entity, as the managerial efforts of Slock.it directed
132. Id. at 239.

134. See, e.g., SEC v. Glenn W. Turner Enters., 474 F.2d 476, 482-83 (9th Cir. 1973).
135. SEC v. ETS Payphones, Inc., 408 F.3d 727 (11th Cir. 2005).
136. Id. at 736-37.
137. Id. at 732.
138. Id.
the choices token-holders could make. 139 A truly democratic blockchain network
must give genuine opportunity to participate in the direction the network will take,
and encourage, if not require, participation to a certain degree. This is a challenge
for most for-profit companies as it goes against a traditional business model of stra-
tegic direction and control from a cadre of senior managers.
Contrast these cases, however, with Endico v. Fonte, where the court found that
there was no investment contract when the membership interests in an apartment
building for a rehabilitation project required buyers to perform construction work
and manage the project themselves. 140 Consider also Williamson v. Tucker, where
the court stated, “so long as the investor has the right to control the asset he has
purchased, he is not dependent on the promoter or on a third party for ‘those es-
sential managerial efforts which affect the failure or success of the enterprise.’” 141
A word must be said about token mining and whether the acquisition of tokens
by mining done through one’s own efforts is different from tokens directly pur-
chased in an ICO. Does this make a difference in determining the existence of an
investment contract under Howey? The short answer is no.
On the surface, the acquisition of tokens by mining is done through the inves-
tor’s efforts, rather than the efforts of others. However, how the token derives fun-
damental value is ultimately the central question. If mining also grants other rights
and control, such as in a proof of stake system, perhaps the “managerial efforts of
others” standard is not met. Compare this situation to the purchase of silver bars
from a promoter, where the value of the investment, once acquired, depends on
fluctuations of the silver market, rather than the efforts of the promoter. 142 More
and more, Bitcoin seems to resemble this scenario, since its value is tied more to
speculation rather than its use as a digital tool. Yet if one merely acquires the token
by mining as opposed to purchasing, and the value of the token is tied to the efforts
of managers, promoters, and developers, i.e. third parties, the balance is likely to tip
the other way. Mining does not change the analysis. Based on the majority of ICOs
139. See U.S. SECURITIES AND EXCHANGE COMMISSION, supra note 5, at 13 (“Investors had lit-
tle choice but to rely on [Slock.it’s] expertise.”).
140. See Endico v. Fonte, 485 F. Supp. 2d 411, 415 (S.D.N.Y. 2007).
141. Williamson v. Tucker, 645 F.2d 404, 421 (5th Cir. 1981). The 5th Circuit found that
there were sufficient doubts that the interests in a real estate joint venture were due to the man-
agerial efforts of others and therefore could be considered investment contracts. The Circuit
Court reversed and remanded to the lower court. Id.
142. See Noa v. Key Futures, Inc., 638 F.2d 77, 79 (9th Cir. 1980).
to date, mining would appear to have no impact on the security determination un-
der Howey. The majority of tokens created by a new blockchain network generally
are created to be sold, not to be mined. Mining may be a nice incentive from a busi-
ness development perspective, but it is not a game changer in the securities regula-
tory analysis.
Overall, therefore, the analysis is likely to depend on the significance of the
efforts of the management team or network designers (the “others”) as compared
to token purchasers and token miners (the “investors”). In the seminal case SEC v.
Glenn W. Turner Enterprises, the Second Circuit stated that a key factor in its deter-
mination was “whether the efforts made by those other than the investor are the
undeniably significant ones, i.e. those essential managerial efforts which affect the
failure or success of the enterprise.” 143
SUMMARY NOTE
As the case law suggests and the SEC confirmed in the DAO Report, there is no
blanket, bright-line rule across all industries or scenarios, or even within the four
factors of the Howey test. SEC Commissioner Peirce, who favors a more measured
approach to token regulation and new technologies, recently stated, “the applica-
tion of Howey to one particular ICO does not answer every question.” 144 Invest-
ment contracts vary widely, unlike common stock and other express statutory se-
curities. While a factual case-by-case analysis is imperative prior to holding an ICO,
the rebuttable presumption will be that most ICOs involve the sale of securities and
are therefore subject to SEC regulation. A concerted effort factoring network de-
sign, business development strategy, and legal analysis will be required to overcome
the presumptive outcome.
VI. ADAPTING TO THE POST-DAO REPORT ENVIRONMENT: PRACTICE

GUIDELINES
To date, the DAO Report has not dampened the market for ICOs or the appe-
tite for new digital tokens. Nor does it appear that there has been a mass exodus of
143. 474 F.2d 476, 482 (9th Cir. 1973).

144. Hester Peirce, Wolves and Wolverines: Remarks at the University of Michigan Law School
(Sep. 24, 2018), https://perma.cc/7KQT-7HRF.
ICOs from the US market. While the SEC has drawn a line in the sand, other coun-
tries like China 145 and South Korea 146 have issued an outright ban on all ICOs and
cryptocurrency exchanges. The extent to which these bans will remain in force over
the long term remains to be seen. Still other jurisdictions like Gibraltar, the Isle of
Man, Singapore, and Switzerland appear to have declared their intentions to de-
velop a light-touch, friendly regulatory environment to attract this developing in-
dustry. 147
For the present, and unless and until the SEC issues further guidance or rule-
making proceedings on digital tokens as securities, one must fit into the existing
framework as the SEC expressly stated in the DAO report.
The first stage of deciding how to conduct an ICO is a thorough technical and
legal analysis of the network to be constructed and its digital token. The utility of
the token within and outside of the network must be addressed in this analysis, as
well as the stage of development of the network itself. A good rule of thumb for any
aspiring blockchain entrepreneur is that if the token is not an essential element of
either the network or the system, first, it is not needed, and second, an ICO is prob-
ably not a good idea. This technical assessment facilitates the legal review of the
proposed token and ICO under the Howey test. For the sake of the discussion below,
we will assume that our hypothetical token is a security.
With a security token, capital financing options must fit into the existing SEC
regulatory framework. Our startup venture has a few safe harbor options to avoid
registration under §5 of the 1933 Act: Regulation A, Regulation D, Regulation
Crowdfunding, and Regulation S.
(1) REGULATION A(+)
Regulation A provides exemption from general registration Section 5, allowing

companies to offer and sell securities to the public with limited disclosure require-
ments and at a capped amount of money that can be raised. The rules are intended
to provide access to capital for small and medium size enterprises without incurring
145. Tian Chuan & Rachel-Rose O’Leary, China Outlaws ICOs: Financial Regulators Order
Halt on Token Trading, COINDESK (Sept. 4, 2017, 13:40 UTC), https://perma.cc/9U8L-W93U.
146. Rachel Rose O’Leary, South Korean Regulator Issues ICO Ban, COINDESK (Sep. 30, 2017
at 08:50 UTC), https://perma.cc/ERJ5-255H.
147. See, e.g., Jeff John Roberts, Tax Havens Eye a New Sideline: Initial Coin Offerings, FORTUNE
(Sep. 26, 2017), https://perma.cc/MDB3-LCZ3 (discussing Gibraltar, the Isle of Man, and Swit-
zerland); Joshua Althauser, Singapore Becomes Favored ICO Destination for Blockchain Companies,
COINTELEGRAPH (Sept. 5, 2017), https://perma.cc/4KX5-QCV8 (discussing Singapore).
the significant costs of registration, and to open investment to unaccredited inves-

tors under certain conditions, limiting their investment amount based on annual
income and net worth. 148 Regulation A was amended through the Jumpstart Our
Business Startups Act or JOBS Act of 2012, establishing revised categories for eq-
uity crowdfunding.149 The categories are Tier 1 and Tier 2, respectively. Under a
Tier 1 financing, a company may raise up to US$20M in a given 12-month period
without having to file a registration statement with the SEC, but will still be subject
to state securities regulations and registration requirements, to the extent applica-
ble, where offered for sale. 150 This can still be an expensive proposition, costing in
excess of $1M in legal and other expert fees, as well as state registration fees. Tier 2
financing (an undertaking at least as expensive as Tier 1) allows companies to raise
up to US$50M in a given 12-month period without having to file a registration with
the SEC. Tier 2 exempts companies from state securities laws and registration re-
quirements. To qualify for a Tier 2 financing, companies must have at least two
years of audited financial statements; they must also file annual, semiannual, and
current events reports, and limit offering to unaccredited investors contributions
to 10% of the investors’ annual income or net worth. All financing under Regulation
A must go through an SEC-registered broker or dealer, or an equity crowdfunding
portal.151
(2) PRIVATE PLACEMENT: SECTION 4(A)(2) AND REGULATION D
Section 4(a)(2) of the 1933 Act exempts from registration transactions not in-
volving any public offering.152 Such an offering may be called a “private place-
ment.” It is important to note that private placements eclipse public offerings by a
significant margin. The seminal Ralston Purina case further explored private place-
ments, stating that the central issue in any such offering was the sophistication of
the investors, that is whether the investors could “fend for themselves” and make
an evaluation of the proposed investment in securities. 153 While companies may
148. An accredited investor is someone with a net worth of at least US$1,000,000 excluding
the value of the primary residence, or net income of US$200,000 (US$300,000 combined for mar-
ried couples). See SEC Rule 501, 17 C.F.R. § 230.501 (2017).
149. SEC, Press Release: SEC Adopts JOBS Act Amendments to Help Entrepreneurs and Investors,
Rel. No. 2017-78 (Apr. 5, 2017), https://perma.cc/9H54-8BAA. (The release provides a historical
summary of the regulatory changes implemented following passage of the JOBS Act.)
150. See 17 C.F.R. § 230.251 (2017).
151. 17 C.F.R. § 227.100(a)(3) (2018).
152. See 15 U.S.C. § 77d(a)(2) (2017).
153. See SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1952).
still conduct private placements under the statute itself, the SEC established formal
rules under Regulation D for their conduct pursuant to Rules 504, 505, and 506. 154
With the recent repeal of Rule 505, only Regulation D financing under Rules 504
and 506 remain.155
The current version of Rule 504 allows privately held, non-reporting compa-
nies to offer securities in a private placement of up to US$5,000,000 in a given 12-
month period (less the aggregate price for all securities sold within the prior 12
months).156 There are no limits on the number of investors who may participate. 157
General solicitation and advertising of Rule 504 offerings is prohibited, and securi-
ties must be held for at least one year before they can be resold. 158 Issuers must still
comply with state securities laws wherever they are sold.
Rule 506 is an attractive option for companies needing to raise significant cap-
ital. Both private and public companies may offer securities under Rule 506. There
is no dollar limit to the amount of capital that may be raised, but only accredited
investors and up to 35 unaccredited investors may participate, provided that they
are “sophisticated” and sufficient information is disclosed to the unaccredited in-
vestors to allow them to make an informed decision. Rule 506(c) allows for general
solicitation and advertising, but is limited to accredited investors whose accredita-
tion status must be verified. Like Rule 504 offerings, securities sold under Rule 506
must be held for at least one year before resale. 159
Rule 506(c) is garnering greater interest in the ICO and digital token world.
Filecoin, a data storage network in construction, recently held a Rule 506 offering
through an SEC-registered portal called Coinlist, and raised over US$257M total,
including pre-sales to certain accredited investors and the ICO itself. 160
(3) REGULATION CROWDFUNDING
154. See 17 C.F.R. §§ 230.504, 506 (2017); see also 17 C.F.R. § 230.505 (repealed 2016).
155. See 17 C.F.R. § 230.505 (2017); see also Exemptions To Facilitate Intrastate and Regional
Securities Offerings, 81 Fed. Reg. 83,494 (Nov. 21, 2016) (to be codified at 17 C.F.R. pts. 200, 230,
239, 240, 249, 270, and 275).
156. 17 C.F.R. § 230.504 (2018).
157. Id.
158. See 17 C.F.R. § 230.144; 17 C.F.R. § 230.905 (2018).
159. See id.
160. See Stan Higgins, $257 Million: Filecoin Breaks All-Time Record for ICO Funding,
COINDESK (Sep. 7, 2017, 20:45 UTC), https://perma.cc/W8G2-6J3S; see also Brady Dale, Here’s
How Filecoin’s Token Sale Won’t Irk the SEC (Like The DAO Did), OBSERVER (Aug. 3, 2017, 5:27 PM),
https://perma.cc/23W7-JDCW.
Crowdfunding is a relatively new and evolving method of using the Internet to

raise capital to support a wide range of ideas and ventures. An entity or individual
raising funds through crowdfunding “typically seeks small individual contributions
from a large number of people.” 161 Title III of the Jumpstart Our Business Startups
(JOBS) Act of 2012 added Securities Act Section 4(a)(6), which provides an exemp-
tion from registration for certain crowdfunding transactions.162 “Regulation
Crowdfunding” was adopted by the SEC in 2015 and went into effect on May 16,
2016. 163
All securities issued under Regulation Crowdfunding must go through an SEC-
registered and -approved crowdfunding portal.164 The maximum capital that may
be raised under this regulation is US$1,070,000 in a given 12-month period. 165 As
with Regulation A, investor contributions are limited based on annual income or
net worth. 166 Although the amount of expert fees is quite a bit less costly than for
standard Regulation A financing, the capital raised is very limited and may not reach
its goal to be sufficiently beneficial for funding operations. Regulation Crowdfund-
ing is a good alternative to traditional angel investment for early stage startups that
do not require significant capital to fund operations or product development.
(4) REGULATION S – OFFSHORE TRANSACTIONS
U.S. companies may also choose to offer equity or debt securities under Regu-
lation S. 167 Regulation S offerings are not subject to full registration in the United
States, but must meet certain criteria and comply with the local laws of the coun-
tries in which they are offered. 168
Nonetheless, holding a Regulation S offering does not mean the ICO will be
welcomed abroad. On September 5, 2017, China outlawed both the initial sale or
161. See SEC, REGULATION CROWDFUNDING: A SMALL ENTITY COMPLIANCE GUIDE FOR
ISSUERS n.2 (May 13, 2016, updated Apr. 5, 2017), https://perma.cc/7GKU-V4LH; see generally 17
C.F.R. §§ 227.100-.503 (2018).
162. See Press Release, U.S. Securities and Exchange Commission, SEC Adopts Rules to Per-
mit Crowdfunding (Oct. 30, 2015), https://perma.cc/PDP3-3FQU.
163. Id.
164. See 17 C.F.R. §§ 227.100(a)(3) (2018).
165. 17 C.F.R. § 227.100(a)(1) (2018).
166. 17 C.F.R. § 227.100(a)(2) (2018).
167. 17 C.F.R. §§ 230.901-905 (2018).
168. Id.
ICO and the secondary trading of digital tokens, stating that the financing mecha-
nism is illegal under PRC law. 169 Chinese regulators also made specific reference to
the potential of digital tokens for fraud, abuse, and criminal activities.170 South Ko-
rea followed suit shortly thereafter, banning all ICOs on September 29, regardless
of whether the offering was already subject to local securities or banking laws. 171
The UK’s Financial Conduct Authority (“FCA”) appears to be taking a case-by-case
approach comparable to the SEC’s; however, it has issued a warning to potential
investors on the perils of ICOs. 172 Further action from the UK FCA is expected as
it continues to study the issue. 173
But a number of countries are courting blockchain and digital token entrepre-
neurs actively. The Isle of Man, a Crown Dependency located in the Irish Sea, is
primarily a financial services center and a known business and tax-friendly juris-
diction.174 The Isle of Man developed a cryptocurrency legal framework in 2015
and began to solicit interest from would-be ICOs in 2016. 175 The first Isle of Man
ICO was held in 2017 by “Adel Ecosystem” and several more are in the regulatory
pipeline.176 Isle of Man ICOs require only a short form registration rather than a
license. 177 In the Isle of Man, ICOs are registered with the Isle of Man Financial
Services Authority for oversight of AML/CFT; this registration does not constitute
full financial services licensing.178 If, however, the ICO is deemed to be an offering
of securities, a “collective investment scheme” license is required by the Isle of Man
Financial Services Authority. 179
169. See Chuan and O’Leary, supra note 145; see also Wolfie Zhao, China’s ICO Ban: A Full
Translation of Regulator Remarks, COINDESK (Sep. 5, 2017 14:00 UTC), https://perma.cc/ZQ4D-
P8TK (describing and translating a statement from the Chinese government).
170. Id.
171. Cynthia Kim, South Korea Bans Raising Money Through Initial Coin Offerings (Sept. 28,
2017 10:46p.m.), REUTERS, https://www.reuters.com/article/us-southkorea-bitcoin/south-ko-
rea-bans-raising-money-through-initial-coin-offerings-idUSKCN1C408N.
172. See UK FINANCIAL CONDUCT AUTHORITY, Initial Coin Offerings (Sep. 12, 2017),
https://perma.cc/BW5Y-RHEJ.
173. See Damian Fantato, Digital Currencies Could Be Hit by FCA Regulation, FT ADVISOR
(Oct. 30, 2018), https://perma.cc/M5XT-MFUH.
174. Telephone Interview with Brian Donegan, COO, E-Business and FinTech Innovation,
Isle of Man Gov’t (Oct. 31, 2017) (on file with author).
175. Id.
176. Id.
177. Id.
178. Id.
179. Id.
Singapore has been a favored destination for ICOs, particularly of foreign com-
panies. 180 Although the Monetary Authority of Singapore declined to regulate vir-
tual currencies, the rapid increase in ICOs led it to issue a clarification statement
that digital tokens would have to register as securities if they fell within the legal
definition of capital markets products under the Securities and Futures Act and
were not exempted. 181 Like the United States, Singapore appears to be taking a
case-by-case approach but does not appear intent on regulating ICOs as aggres-
sively.
VII. BEST PRACTICES FOR U.S. COMPANIES PLANNING AN ICO
The foregoing review shows that the Securities and Exchange Commission will
evaluate digital tokens sold under an ICO based on the factors of the Howey test to
determine whether such sales constitute an investment contract. Statements from
the new SEC chairman clearly indicate that a positive finding is likely to be the de-
fault position and rebuttable presumption. 182 With this in mind, we will consider,
within the investment contract framework, how a startup can best prepare for an
ICO. It must be noted that the opinions expressed herein do not constitute legal
advice, and that anyone with the intent of launching an ICO needs to retain legal
counsel. The SEC has indicated that its emphasis will be on transparency and pro-
tecting investors from fraud and scams.183 A start-up company developing a bona-
fide blockchain network and digital token system would do well to heed these
warnings or potentially face a call from the Enforcement Division’s new Cyber
Unit.
(1) THE WHITE PAPER
Most ICOs contain a document called a “White Paper” that describes the net-
work to be built and the business to be established. They range in structure from
academic-like technical papers, crammed with algorithms and diagrams, to bare-
180. Althauser, supra note 147.

181. See Monetary Authority of Singapore, MAS Clarifies Regulatory Position on the Offer of
Digital Tokens in Singapore (Aug. 1, 2017), https://perma.cc/R5YL-YAXK; see also Monetary Au-
thority of Singapore, A Guide to Digital Token Offerings 2 (Nov. 14, 2017), https://perma.cc/B97Y-
6RUH.
182. See Jack Mathis, ICOs Are Securities, ‘Don’t Know How Much More Clear I Can Be,’: SEC
Chairman, CRYPTOCURRENCY NEWS (Jun. 14, 2018 02:00 CET), https://perma.cc/Z5UL-USS5.
183. See SEC, No Action Letters, supra note 75.
bones marketing leaflets. In the post-DAO world, neither end of the spectrum is
acceptable. Although a statutory prospectus under the requirements of Section
10(a) of the 1933 Act are not required, in the Regulation A, D, Crowdfunding, and
S options discussed above, the document should contain sufficient information for
an investor to make an informed decision. Disclosure to investors and transparency
of information will help to demonstrate the viability of the project. In short, the
document that the ICO industry calls a white paper needs to resemble a private
placement memorandum, even if the information contained therein does not meet
all of the statutory requirements of a Section 10(a) prospectus. A Regulation D of-
fering is still a Regulation D offering, regardless of the purpose of the business or
the underlying technology employed to raise capital. The disclosures need to re-
semble investment bank-grade documentation, to inspire investor confidence,
meet regulator concerns, and mitigate risk. This means pro forma financial state-
ments, sufficient MD&A, and other elements common to a private placement mem-
orandum.
(2) PROOF OF CONCEPT AND PROTOTYPE
A startup company intending to hold an ICO should already have its network
development well underway. Without giving away proprietary IP, startups should
make executable code available for prospective investors (or their advisors) to test
as a demonstration of the network to be built. This can be as basic as a “proof of
concept,” i.e. a demonstration that the project is viable; however, a more robust
prototype network, even if self-contained and with limited functionality, is better.
Entrepreneurs and coders alike frequently post such software to sites like GitHub,
a web-based, version-control software platform for developers. 184
(3) CYBERSECURITY
A benefit of the blockchain network concept is improved security, and the vir-
tual inability to alter or erase an entry once it is coded to the blockchain. However,
the security of ICO web platforms, and “digital wallets” that serve as a repository
for your tokens, Bitcoin, Ether, etc., is far less certain. A contributing factor to the
184. See GITHUB, https://perma.cc/YW5N-TT2W (archived Oct. 28, 2018), for examples of
various software projects in development. Most projects on GitHub are open source software-
based and posted to demonstrate their technological capabilities, rather than to build a business.
Nevertheless, it is one of the standard repositories for software development and highly respected
in the tech community.
SEC’s selection of the DAO as its test case was the high-profile hack that compro-
mised millions of dollars of invested funds. While this is not directly a securities
regulation issue for an ICO, lack of adequate protections for investors during an
ICO could give rise to litigation from private investors at a minimum. Cybersecu-
rity measures must protect not only the company but also its investors.
(4) TERMS AND CONDITIONS OF SALE
Terms and conditions of ICOs for US-based start-ups to date have varied
greatly. At a minimum, pre-DAO Report, terms and conditions have addressed the
mechanism for purchasing tokens, assumption of risk, and contractual boilerplate;
many included a statement that the token is not a security. 185
Some companies and attorneys saw the writing on the wall and developed a
new form of agreement that has seen increasing adoption—the “Simple Agreement
for Future Tokens,” or SAFT. The SAFT project was an outgrowth of a similar doc-
ument called the “Simple Agreement for Future Equity,” or SAFE, developed in
2013 by Y Combinator, a seed funding accelerator based in Mountain View, Cali-
fornia.186 SAFE is an agreement with an investor that provides rights to equity to
the investor without specifying a price for share. 187 It was intended to replace a
convertible debt instrument and acts like a warrant, entitling the purchaser to
shares in the company. It has been used successfully in Regulation D offerings.
Y Combinator, AngelList (an online startup community), and others built on
the work of SAFE to make the SAFT. The impetus behind the SAFT structure is the
fact that there is no bright line rule that determines which types of tokens are secu-
rities and which are not.188 Under the SAFT, an investor purchases the right to own
tokens once the network is completed. 189 The startup developing the network con-
ducts the sale under an SEC-approved financing method such as Regulation D.
Once the network is up and running, the company issues the tokens to the investor,
who may use them on the network or sell them, after any contractual or regulatory
lock-up period, hopefully at a profit. The company will also be free to sell tokens
185. Retrieved examples include ICO terms and conditions for “Patientory” “Wagerr,”
“Storj,” and “Suncontract.” It is unknown whether these terms and conditions are still available
online (on file with the author).
186. See Simple Agreement for Future Equity, WIKIPEDIA, https://perma.cc/2GS2-5XQF (last
visited Nov. 15, 2017).
187. See id.
188. See Jerry Brito, The SAFT Is a Symptom of Regulatory Uncertainty, COINDESK (Nov. 13,
2017 14:00 UTC), https://perma.cc/J6HE-YYFG.
189. See THE SAFT PROJECT, https://perma.cc/KZ9L-CZK6 (last visited Dec. 5, 2017).
on the market, through a private sale or an SEC-approved exchange. Rather than

delivering a non-functional, or “pre-functional” token to a user, the company sells
a security in the tokens to be developed. 190 The tokens are delivered when the net-
work becomes operational. Whether, on network launch, the token morphs into a
utility, a commodity, or something other than a security, is irrelevant for purposes
of the initial sale. The SAFT, it is claimed, falls within the US securities regulatory
framework by establishing that a security in a token and its network is what is being
sold. Yet there is no guarantee that the US Government will agree with this suppo-
sition; indeed, both SEC Chairman Clayton’s remarks and the number of subpoe-
nas issued in 2018 would suggest to the contrary. 191 The SEC has not commented
officially on the SAFT as of the time of this article.
Whether companies opt to use the SAFT or a more traditional securities sub-
scription contracting vehicle may depend on the purpose of the token and block-
chain network supporting it. Tokens that share the characteristics of a utility more
than an investment vehicle on deployment may benefit from the SAFT. Tokens that
are clearly part of an investment opportunity may do well to fall back on a tradi-
tional subscription-like agreement.
VIII. STATE OF THE MARKET POST DAO REPORT
The full impact of the DAO Report and subsequent creation of an Enforcement
Cyber Unit at the SEC will not be realized for some time. So far, the enthusiasm for
ICOs has not dampened, and new ICO announcements come out almost every day.
Bitcoin, Ether, and other major cryptocurrencies continue to appreciate at break-
neck pace, despite outright legal bans and the scorn and condemnation of billion-
aire bankers.
The extent to which blockchain start-ups are seeking professional legal advice
or continuing to throw caution to the winds remains to be seen. The Cyber Unit is
likely to bring more enforcement actions against ICOs, stopping them in their
tracks. Yet whether they will focus on obvious fraudulent schemes, with little or no
intention of building a network, or on well-meaning but misguided development
projects, remains to be seen.
190. See Marco Santori, Appcoin Law Part 2: The SAFT Solution, COINDESK (Oct. 3, 2017 12:00
UTC), https://perma.cc/M94C-XS8L.
191. See Michaels and Vigna, supra note 83; see also Aaron Kaplan, SEC Subpoenas Show the
SAFT Approach to Token Sales Is a Bad Idea, VENTUREBEAT (Mar. 3, 2018 12:11pm),
https://perma.cc/U598-9WC2.
For those that choose the conservative route, there is little doubt that the cost
to issue an ICO will go up significantly. Lawyers, accountants, SEC-registered to-
ken listing platforms, and would-be token investment bankers do not come cheap.
Whether this will drive ICOs overseas en-masse remains to be seen.
Regulatory authorities in major bitcoin and token markets such as Russia, Sin-
gapore, the UK, and Canada are issuing, if not new regulations, then at least state-
ments, warnings, and investor advisories that tokens might be securities under ex-
isting laws. It is also likely that China and South Korea will re-enter the digital token
world at some point in the near future, albeit under a new legal framework giving
the central government a greater degree of control and regulation.
When we will see legislative or regulatory action in the US is also unknown. It
is likely that the government will focus on enforcement actions and further study
before they are ready to consider a new rulemaking or suggest developing an ena-
bling statute that might create a new securities financing regulation similar to Reg-
ulation Crowdfunding.
In the positive, the DAO Report and Cyber Unit can help to weed out the huck-
sters and fraudsters, and force new, well-meaning but inexperienced back-of-the-
napkin startups to take more time on both product and business development be-
fore turning to the market for a large infusion of capital. It may also encourage more
industry coordination and development of self-regulation standards and best prac-
tices. ICO consultants such as Smith and Crown in Brooklyn, New York are devel-
oping their own rating and analysis system for ICOs and publishing review reports
on select projects. 192 Others are following suit. 193 The development of common
standards for review, based on sound corporate finance valuation principles, and
the advent of premier “ratings agencies,” for lack of a better term, will serve the
token finance community well, addressing the SEC’s valid concern of investor pro-
tection. Such developments are not on the immediate horizon.
The flip side of the SEC’s concern is not being addressed, however. Like the
gold rush miners of the mid-19th century who overpaid for mining supplies and
bad claims to con artists and schemers, today’s blockchain entrepreneurs are po-
tential prey for huckster “consultants,” charging six figure fees and double-digit
192. See SMITH + CROWN, https://perma.cc/NVK6-WMAG (archived Oct. 27, 2018).

193. Websites that provide ICO ratings and analysis continue to proliferate. See, e.g.,
ICOBENCH, https://perma.cc/568P-HHUJ (archived Nov. 10, 2018); ICORATING,
https://perma.cc/E8L3-6J8G (archived Nov. 10, 2018).
percentages of raised capital for their so-called experience. If the ICOs are cock-
roaches on the market, the leeches that would prey upon them must also be regu-
lated, if not prosecuted.
IX. CONCLUSION
What digital tokens are and how they function varies greatly from network to
network and startup to startup. Is the token a share of equity? Does it grant the right
to future profits? Do token-holders get a say or a vote in the future of the network
or the company building it? How is the token used on the network? Is a token sold
before it can be used analogous to the pre-sale of a future product or service, or
does it have independent value? Does it matter whether the tokens, once purchased,
can be resold right away? Does it matter how they are sold, whether on a central
exchange or privately, peer-to-peer? Even if the answer to every question above is
in the negative, can it still be considered a security?
Digital tokens have the potential to radically change the way companies go
about capital formation and fundraising. Through the invention of “smart con-
tracts” and other hard coded algorithms, digital token sales can bypass or signifi-
cantly reduce the dependence on expensive traditional financial services providers,
leaving greater funding available for product and market development. At the same
time, there is a real need for regulatory supervision to prevent fraud on the public,
and to provide companies with a degree of certainty and a framework to assess
whether their tokens are securities.
The SEC has clearly drawn a line in the sand by asserting regulatory authority
over ICOs pursuant to the Howey test. Major international regulators have followed
suit, although known tax and business-friendly jurisdictions appear to be establish-
ing light-touch regulatory frameworks to attract investment. Creators of digital to-
kens intent on holding an ICO must therefore perform a careful, thorough legal and
technical analysis before offering tokens for sale.
Yet the law is by no means settled and additional questions within the subject
of this paper remain. Can pre-sale tokens convert from a security to a commodity
or something else? Will there or should there be a new SEC regulation category to
encourage ICOs while protecting investors, similar to Regulation Crowdfunding?
Can blockchain technology developers create a legally-binding, technology-based
framework to eliminate the need for investment bankers, lawyers, and accountants,
solving the capital finance equivalent of the Byzantine Generals Problem?
There are many exciting questions yet to be addressed in this rapidly changing
new industry. In a very salient way, the development of cryptocurrencies provides
an insight into how our profession must evolve. The legal profession must evolve
to keep pace with both technical and financial innovations if we are to continue to
add value for our clients.

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From Initial Coin Offerings to Security Tokens:

A U.S. Federal Securities Law Analysis

22 STAN. TECH. L. REV. 52 (2019)

*Michael Mendelson is a partner with Wissing Miller, LLP (www.wissingmiller.com), a boutique

1. All Cryptocurrencies, COINMARKETCAP, https://perma.cc/FD3R-MTT6 (archived

category of regulation. In addition to the SEC, the Commodities Futures Trading

I. DIGITAL TOKENS: BLOCKCHAIN BITCOIN, ETHEREUM, ALTCOINS

EARLY DIGITAL AND CRYPTOCURRENCY SYSTEMS

BLOCKCHAIN – DISTRIBUTED LEDGER TECHNOLOGY

Blockchain, the information technology buzzword of the moment, is most

8. See Ecash, WIKIPEDIA, https://perma.cc/8CPD-V9PV (archived Oct. 19, 2018 3:18 PM

Bitcoin is the first practical solution to a longstanding problem in computer

“[Imagine] a group of generals of the Byzantine army camped with their

written by Russian-Canadian programmer Vitalik Buterin in 2013. Ethereum ini-

II. THE INITIAL COIN OFFERING

As Bitcoin and Ethereum became more established, new projects developed

known as Omni, 26 is a digital currency and communications protocol built on the

26. Omni (Mastercoin) (OMNI), COINGECKO, https://perma.cc/ZB47-PGNS (archived Nov.

44. See HERMANN ELENDNER, ET. AL., THE CROSS-SECTION OF CRYPTO-CURRENCIES AS

risk and return profiles of hundreds of different assets, as well as considerations of

III. OVERVIEW OF US FEDERAL SECURITIES LAW – WHAT IS A SECURITY

1933 ACT – SECTION 2: IS THERE A SECURITY?

47. See id. at 11 (quoting YERMACK, supra note 22).

In short, a security is an interest in a corporation or other legal entity with cer-

INVESTMENT CONTRACTS AND THE HOWEY TEST

A catch-all category of securities, the investment contract received clarity

50. 15 U.S.C. §§ 77c-d (2017).

(1) An investment of money;

This jurisprudence of this case remains generally unchanged in over seventy

“The DAO,” which stands for Decentralized Autonomous Organization, was

53. 328 U.S. 293 (1946).

57. See U.S. SECURITIES AND EXCHANGE COMMISSION, supra note 5, at 1.

67. See id. at 12-14.

70. See Bitcoin (BTC), COINMARKETCAP, https://perma.cc/2LL3-Q6XW (archived Dec. 19,

Blockchain technology presents many interesting issues and can of

Chairman Clayton has been more aggressive in his remarks. On November 9,

DAO Report.88 In Director Hinman’s own words, “. . . the economic substance of

misrepresentations in violation of the Securities Act. 96 In denying the defendant’s

V. WHEN ARE DIGITAL TOKENS SECURITIES? – THE HOWEY ANALYSIS

An important hallmark of the DAO Report is the SEC’s commitment to a fact-

(1) INVESTMENT OF MONEY

96. See id.

(2) COMMON ENTERPRISE

108. Id. at 470.

(3) (B) EXPECTATION OF PROFIT: INTENT TO USE V. INTENT TO PROFIT

112. Id. at 908.

return then it begins to take on the appearance of an investment contract

on the entrepreneurial or managerial efforts of others continue to contain the hall-

(4) THE EFFORTS OF OTHERS

132. Id. at 239.

VI. ADAPTING TO THE POST-DAO REPORT ENVIRONMENT: PRACTICE

143. 474 F.2d 476, 482 (9th Cir. 1973).

(1) REGULATION A(+)

Regulation A provides exemption from general registration Section 5, allowing

the significant costs of registration, and to open investment to unaccredited inves-

(2) PRIVATE PLACEMENT: SECTION 4(A)(2) AND REGULATION D

(3) REGULATION CROWDFUNDING

Crowdfunding is a relatively new and evolving method of using the Internet to

(4) REGULATION S – OFFSHORE TRANSACTIONS