If crypto-currencies have become the subject of legislative changes in taxation (in particular, in the United States and Germany), the tokens produced in the course of the ICO, threatened by the SEC, but is not subject to the common rule. And the main question which requires determining whether tokens of the securities. If the answer is positive, then the lack of proper registration when issuing token means a serious violation of the law and cause a number of measures from the Commission.
In 2016, the official blog of Coinbase cryptocurrency exchange submitted a document entitled “the securities Act in respect of tokens on the blockchain”, developed jointly with the Coin Center, Union Square Ventures and Consensys. It companies apply new technology to court practice in respect of securities and, above all, the so-called “Howey test”.
It was introduced in economic-legal field in the course of case trial in the case of SEC — Howey in 1946. In June 1945, the Howey Company, a Florida farm, engaged in cultivation of citrus in the County of lake, decided to rent out half of their land for “supplementary development”. Thus, buyers “do not have the knowledge, skills and equipment necessary for the cultivation of citrus fruits”, becoming a nominal landowner. By signing the contract for the provision of services for a period of ten years and “expecting that they would earn a profit solely through the efforts of professional farmers”, the buyers of citrus acres were in the grey areas of investment contracts.
As Howey Co. did not register these transactions in the securities and exchange Commission (SEC), it was found that the company violated Federal securities act of 1933, her address was sent an injunction against further sale of the contracts. Howey Co. appealed to the District court for the southern district of Florida, and a ban on the sale of the contracts was cancelled. However, in may 1946, the case was transferred to the United States Supreme court, which upheld the decision of the SEC, recognizing that the contracts Howey are the investment and therefore should be regulated in accordance with the securities act. Judge Murphy, zachityvalis sentence, held: “the defendant offers more than the freehold, something different from a farm or orchard together with management services. They offer the opportunity to invest money and to share in the income of large enterprises in the production of citrus in the management and partial ownership by the defendants. So here are all the characteristics of a commercial business.”
The case is SEC — Howey Co. formed the basis for the future of securities regulation from the SEC. The decision of the court was entered Howey test that provides simple criteria to determine whether the transaction is an investment contract and, accordingly, whether the transaction is under the jurisdiction of the SEC. As the judge ruled Murphy, the decisive criterion for determining the investment agreement — the existence of “investment in joint venture in which the income is provided solely through the efforts of others.” That is, the transaction involves securities, if the value for one side depends on the work of another, or, in other words, if the investor is a “passive interest”.
Enduring the test of Howey in the field of blockchain tokens, Coinbase is composed of the document introduces three key elements to determine whether the token security:
the presence of the fact of investing,
— depends on whether the fate of investment from you or from the actions of others,
— the expectation of profit by the activities of others.
Each element includes several characteristics, according to which points. The more points (that is, the higher the probability that a token performs all three elements), the more the token corresponds to the definition of securities. Coinbase also provides guidance for creating tokens that will not be securities and can be considered as a simple contract identical to the contract of franchise. In this case, the holder of the token has the right “to contribute to the project” and not merely “passive investment interest.”
To specific rights that can be assigned to the token, so it does not fall within the definition of securities are “eligible for programming, development or establishment of features for the system,” “the right to connect to the system, or to grant a license for the system, the right to use the system or the results of its work”, “the right to sell the products created by the system” and “the right to vote on issues the expansion or contraction of the features and functionality of the system.”
Thus, the investigation of the SEC in respect of the ICO project, which became known the other day, definitely will apply Howey test.