Are Initial Coin Offering (ICO) securities for the purpose of Regulatory Compliance under US Security and Exchange Commission ? And Howey’s test!

In Order for any cryptocurrency to be regulated by the SEC USA, certain threshold questions must be satisfied.

One such threshold is to be able to define such a crypto as Securities.

What are Securities ?

Security Act 1933 and Security and Exchange Act of 1934 (Organic Acts) all have a clear definitions what Securities are.

All known Securities (Bonds, stocks etc) were clearly defined in the above statutes except “Investment contract”. However, as there was no clear definition of what an Investment contract is, the court was required to interpret what constitutes an Investment contract.

In 1946, the US Supreme Court in the case of SEC v Howey.

“Fact : The developers of Orange Groves,wound up selling interest in the Orange Grove combined with the land management contract.”

The US Supreme Court held that the package sold by Orange Groves constituted securities because the company wasnt only selling the Orange but the complete contract package including an investment in the land. The test for Securities was then duly laid down in the case of Howey as; There must be an Investment of money, in a common enterprise, with the expectations of Profit coming primarily from the efforts of others.

In a speech by Bill Hinman in 2018, he stated that it’s the SEC’s position that Ethereum is not Securities. Hinman went further to expand how he came to that conclusion because Ethereum was sufficiently decentralised and that no one played the role of a promoter in the system, no one also have sufficient control over the system. Not only was there no promoter, , there was no asymmetry of information and no situation where there was a promoter or issuer who know so much more than the people transacting within the system the system, no one also have sufficient control over the system. Not only was there no promoter, , there was no asymmetry of information and no situation where there was a promoter or issuer who know so much more than the people transacting within the system sale of the securities in question.

In line with this speech by Bill Hinman, it is envisaged that SEC have taken a position that sufficient decentralization means, there is no promoter. However, we are mindful that Hinman’s speech cannot be interpreted as a finding of facts as we are not sure what research was undertaken by him or SEC US at that time to arrive at that position. Would that position not be different at this time ? we are also certain that Hinman’s speech is not a judicial pronouncement which is based on the legal findings of facts and applications of the law.

Let’s now look at the Howey’s test in line with Initial Coin Offering (ICO).

Here are basic fact about initial Coin Offering (ICO):

Send crypto to a third party based on White Paper in exchange for fiat or other crypto obtained with fiat.

Gets a code in Return with
the hope that the Code is worth more when the project get launched

You can sell the crypto to other people to use them in the system with the hope of making profit.

Applying ICO into Howey’s test for Securities

It’s an investment of money (fiat, crypto) in common business enterprise (horizontal commonality) because people are being brought together, veritical commonality as well as there is a promoter who keep a share of the crypto for himself as well and above all, there is an expectation of Profit.

There is no alternative Regulatory Regime to regulating ICO and should be registered under the SEC USA.