SEC Overreach With Howey Test Is Getting Silly
The Securities and Exchange Commission (SEC) claimed a significant victory in its battle against Telegram and its subsidiary Ton Issuer on Tuesday, with a U.S. District Court for the Southern District of New York deciding that Telegram had sold unregistered securities.
In a finding likely to send chills down every Initial Coin Offering (ICO) operator’s spine, the court granted an immediate injunction preventing the company from distributing Gram tokens to its investors.
But this was no ordinary mom-and-pop ICO.
Gram tokens were purchased by accredited investors, with a minimum $1 million bid in place to ensure that the network didn’t fall foul of the decrepit legal framework.
They were also widely sold to non-U.S. investors. The SEC itself argued that only $424.5 million was raised in the United States. From 31 investors. (That’s an average of about $13 million per American investor).
The Howey Test applies if the sale is an investment contract. That is if “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.”
But there are exemptions. One of them is Rule 506(c), which permits the sale of securities to accredited investors. It is that provision on which Telegram relied and on that provision alone, jurisdiction issues aside, that should grant Gram tokens restricted securities status.
Ruling condemns the nature of tokenization Itself
The securities regulator argued, and the court agreed, that the ease with which Ton’s initial private sale investors could sell tokens to investors in the secondary marketplace would render the tokens as securities requiring registration.
In other words, tokenized securities are so easy to sell to mom-and-pop investors that they pass (i.e. fail) the Howey Test for eternity. Telegram’s deliberate exclusion of non-accredited investors did them no favors. How backwards does an ICO issuer have to bend to get the SEC out of its face? (Try picturing that in your mind without conjuring up visions of gymnasts at the 2020 Tokyo Olym… oh!)
Ton’s response was to threaten to fork into a new blockchain network, which would not be subjected to SEC over-zealousness as it had nothing to do with the original sale.
That “fork off, Howey” maneuver and the legal battle that have provoked it both point to the same problem: 87-year-old securities laws don’t work in the brave new world of blockchain-based tokens and more democratized and globalized markets.
Legendary actress Joan Collins is four days older than the legal structure for securities in the United States. She’s never had a face-lift either, and the octogenarian wears her age a lot better than the SEC’s legal arguments.
The SEC has epically failed the sector once again. In a recent dissenting opinion on the decision to issue a denial to yet another ETF application, Commissioner Hester Peirce accused the Commission of “ever-shifting standards that this Commission insists on applying to Bitcoin-related products — and only to Bitcoin-related products.”
Peirce’s Safe Harbor plan, for all its faults, can’t come soon enough.
The Crypto Community’s COVID-19 Response
Amid the outbreak of a Public Health Emergency of International Concern (PHEIC)-cum-pandemic, known varyingly as the novel coronavirus, the coronavirus, COVID-19, and, in Trumpian circles as the China Virus, the crypto community dug into its digital pockets to provide help to those in need.
Binance Charity was quick out of the blocks (quicker than the U.S. government, anyway), with a #CryptoAgainstCOVID initiative. The campaign aims to raise $5 million worth of cryptocurrencies to be spent transparently in the fight against the disease.
The exchange has made an initial donation of $1 million and will match public donations to the same tune. The fund is set to be used to purchase medical supplies for the worst hit countries. Binance has already donated around $1.4 million to efforts to fight the virus in its “Binance for Wuhan” drive.
Startup BABB, which held a high-profile ICO in 2017 and has just released its crypto wallet and banking app, announced it was waiving cash-out fees for COVID-19 fundraisers. BABB’s aim is to be the “world bank for the microeconomy.”
#BitcoinTuesday has been supported by Gitcoin with a $100,00 donation-matching promise. The Giving Block is organizing the campaign, which has signed up partners including Brave, Celsius Network, Cred, and Gemini. Artist Nelly Baksht, featured in this week’s Crypto Art Week, is donating a painting entitled ‘Hope’, inspired by her own negative test for the virus.
(Follow along on Twitter with the hashtag #CryptoCOVID19).
Ripple Labs has also entered the coronavirus giving spree, donating $100,000 to the Tipping Point Emergency’s Response Fund and a matching amount to the Silicon Valley Community Foundation’s COVID Regional Response Fund. While the gesture was more locally oriented, California has been hard hit by the virus, with almost 3,000 reported cases.
The cryptocurrency industry has a reputation for harboring sycophants, mercenaries, criminals, and Lambo-aspirant shitcoin peddlers. But it has a heart, with Binance’s Blockchain Charity Foundation, Paxful’s #BuiltWithBitcoin campaign to build schools in Africa, and Ripple’s social impact program, Ripple for Good, leading the way.
Saint Augustine once wrote that “Charity is the root of all good works.” With that in mind, this week the crypto community nailed it.
Opinions expressed in this column are those of the author.