Cyptocurrency evolution to Security Status, Middle Market Emergency & the future of Initial Coin Offerings (ICO)
The Securities & Exchange Commission decided that P2P systems are now a product subject to Registration Requirements. A messaging service KIK interactive raised one hundred million dollars ($100,000,000) in 2017 as an Initial Coin Offering (ICO). According to sources reported on Bloomberg The KIK 2017 token sale was considered an improper unregistered offering. The offering was conducted as the user KIK user base decreased.
In lieu of selling stock KIK decided to offer tokens. Cryptocurrency advocates long argue that tokens are not a security but a medium of exchange (similar to currency).
The SEC disagrees on this point. The SEC views tokens as “Investment Contracts”. Obviously a token is not a Note, Bond or Stock. Securities Act defined a security to mean a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
The concept of investment contracts was taken from a land mark case, SEC v. WJ Howey Co which clarified the term of investment contract.
“… an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party…. Such a definition…permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to the issuance of the many types of instruments that in our commercial world fall within the ordinary concept of a security…. It embodies a flexible rather than a static principle, 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.”
Howey established a four-part test. In particular, an investment contract exists where there is:
(i) An investment of money — Although in Howey the term “money” was used, subsequent case law expanded the concept to include any form of consideration where value can be established (such as mowing your neighbor’s lawn).
(ii) Common enterprise — Subsequent court cases are not consistent regarding “common enterprise.” The majority of federal courts appear to define common enterprise as involving “horizontal commonality,” — involving the pooling of money or assets from multiple investors whereby investors share in the profits and risk in some proportion.
(iii) Expectation of profits — Profits can either be in the form of appreciation, cash return on investment or other earnings (including dividends or interest).
(iv) Derived solely from efforts of promoters or third parties — Efforts of promoter(s) or third party(ies) must be undeniably significant in the success or failure of the enterprise.
In summary the Four (4) Prong Test of a security is money exchanged for 1) Anticipated Profit, 2) Third Party Managed, 3) Possible Risk of Loss, and 4) Common Enterprise.
As there has been no official ruling on whether cryptocurrency is officially considered money or not. The SEC has taken the view ICOs are investment contracts. In the most basic idea of common sense I think most agree.
Everyone expects to make profits in the KIK Initial Coin Offering (ICO). The entire enterprise is a common entity that accepts money. The entity itself is completely third party managed. There is no guarantee any ICO will perform (thus risk of loss).
The middle space emerging within the ICO Market is for securities attorneys, broker dealers, or registered investment advisors willing to assist in proper documentation compilation of registered offerings in relation to cryptocurrency issuers.
To be frank, I believe most people are petrified to raise money under an ICO. A professional who has Error’s & Omission Insurance can significantly capitalize off this fear to demand hefty premiums.
Categorizing a particular ICO as a debt security that’s listed (or relying upon an exemption under proper Regulation D) will eliminate many headaches associated with ICOs. The risk for professionals is low. A registered or exempt debt offering is a Promissory Note or Bond with a cool “token exchange feature”. For a licensed professional who is knowledgeable risk is low with proper disclosure.
Failure of established firms to accept business means smaller firms have opportunity. The interest of the SEC is to regulate any form of activity where people seek to earn money. If an activity is purely commercial in nature with limited to no oversight — beware the SEC will step in to figure out if you have sold securities.
Recognizing disorganization of the ICO market, its lack of professional authority and decentralization creates large market gaps for professional entrepreneurs. Filling space that has no occupancy is the fastest way to gain market share. First to race is often first to place. If no other contestants run your race you’re guaranteed first place.
Why do a regular Private Placement Memorandum (PPM) for $5,000 when you can do an ICO PPM for $50,000? Discover new opportunities, more middle space market applications, and more by following me on Medium or signing up for my quarterly newsletter.
To your opportunity success professional!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com.