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Howey Test and Cryptocurrencies: 'Every ICO Is a Security'
What Is the Howey Test?
To determine whether a transaction qualifies as a "investment contract" and thus qualifies as a security, the Howey Test refers to the U.S. Supreme Court cass: the Securities Act of 1933 and the Securities Exchange Act of 1934. According to the Howey Test, an investment contract exists when "money is invested in a common enterprise with a reasonable expectation of profits from others' efforts."
The test applies to any contract, scheme, or transaction. The Howey Test helps investors and project backers understand blockchain and digital currency projects. ICOs and certain cryptocurrencies may be found to be "investment contracts" under the test.
Understanding the Howey Test
The Howey Test comes from the 1946 Supreme Court case SEC v. W.J. Howey Co. The Howey Company sold citrus groves to Florida buyers who leased them back to Howey. The company would maintain the groves and sell the fruit for the owners. Both parties benefited. Most buyers had no farming experience and were not required to farm the land.
The SEC intervened because Howey failed to register the transactions. The court ruled that the leaseback agreements were investment contracts.
This established four criteria for determining an investment contract. Investing contract:
- An investment of money
- n a common enterprise
- With the expectation of profit
- To be derived from the efforts of others
In the case of Howey, the buyers saw the transactions as valuable because others provided the labor and expertise. An income stream was obtained by only investing capital. As a result of the Howey Test, the transaction had to be registered with the SEC.
Howey Test and Cryptocurrencies
Bitcoin is notoriously difficult to categorize. Decentralized, they evade regulation in many ways. Regardless, the SEC is looking into digital assets and determining when their sale qualifies as an investment contract.
The SEC claims that selling digital assets meets the "investment of money" test because fiat money or other digital assets are being exchanged. Like the "common enterprise" test.
Whether a digital asset qualifies as an investment contract depends on whether there is a "expectation of profit from others' efforts."
For example, buyers of digital assets may be relying on others' efforts if they expect the project's backers to build and maintain the digital network, rather than a dispersed community of unaffiliated users. Also, if the project's backers create scarcity by burning tokens, the test is met. Another way the "efforts of others" test is met is if the project's backers continue to act in a managerial role.
These are just a few examples given by the SEC. If a project's success is dependent on ongoing support from backers, the buyer of the digital asset is likely relying on "others' efforts."
Special Considerations
If the SEC determines a cryptocurrency token is a security, many issues arise. It means the SEC can decide whether a token can be sold to US investors and forces the project to register.
In 2017, the SEC ruled that selling DAO tokens for Ether violated federal securities laws. Instead of enforcing securities laws, the SEC issued a warning to the cryptocurrency industry.
Due to the Howey Test, most ICOs today are likely inaccessible to US investors. After a year of ICOs, then-SEC Chair Jay Clayton declared them all securities.
SEC Chairman Gensler Agrees With Predecessor: 'Every ICO Is a Security'
Howey Test FAQs
How Do You Determine If Something Is a Security?
The Howey Test determines whether certain transactions are "investment contracts." Securities are transactions that qualify as "investment contracts" under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The Howey Test looks for a "investment of money in a common enterprise with a reasonable expectation of profits from others' efforts." If so, the Securities Act of 1933 and the Securities Exchange Act of 1934 require disclosure and registration.
Why Is Bitcoin Not a Security?
Former SEC Chair Jay Clayton clarified in June 2018 that bitcoin is not a security: "Cryptocurrencies: Replace the dollar, euro, and yen with bitcoin. That type of currency is not a security," said Clayton.
Bitcoin, which has never sought public funding to develop its technology, fails the SEC's Howey Test. However, according to Clayton, ICO tokens are securities.
A Security Defined by the SEC
In the public and private markets, securities are fungible and tradeable financial instruments. The SEC regulates public securities sales.
The Supreme Court defined a security offering in SEC v. W.J. Howey Co. In its judgment, the court defines a security using four criteria:
- An investment contract's existence
- The formation of a common enterprise
- The issuer's profit promise
- Third-party promotion of the offering
Read original post.
More on Web3 & Crypto
Yogesh Rawal
3 years ago
Blockchain to solve growing privacy challenges
Most online activity is now public. Businesses collect, store, and use our personal data to improve sales and services.
In 2014, Uber executives and employees were accused of spying on customers using tools like maps. Another incident raised concerns about the use of ‘FaceApp'. The app was created by a small Russian company, and the photos can be used in unexpected ways. The Cambridge Analytica scandal exposed serious privacy issues. The whole incident raised questions about how governments and businesses should handle data. Modern technologies and practices also make it easier to link data to people.
As a result, governments and regulators have taken steps to protect user data. The General Data Protection Regulation (GDPR) was introduced by the EU to address data privacy issues. The law governs how businesses collect and process user data. The Data Protection Bill in India and the General Data Protection Law in Brazil are similar.
Despite the impact these regulations have made on data practices, a lot of distance is yet to cover.
Blockchain's solution
Blockchain may be able to address growing data privacy concerns. The technology protects our personal data by providing security and anonymity. The blockchain uses random strings of numbers called public and private keys to maintain privacy. These keys allow a person to be identified without revealing their identity. Blockchain may be able to ensure data privacy and security in this way. Let's dig deeper.
Financial transactions
Online payments require third-party services like PayPal or Google Pay. Using blockchain can eliminate the need to trust third parties. Users can send payments between peers using their public and private keys without providing personal information to a third-party application. Blockchain will also secure financial data.
Healthcare data
Blockchain technology can give patients more control over their data. There are benefits to doing so. Once the data is recorded on the ledger, patients can keep it secure and only allow authorized access. They can also only give the healthcare provider part of the information needed.
The major challenge
We tried to figure out how blockchain could help solve the growing data privacy issues. However, using blockchain to address privacy concerns has significant drawbacks. Blockchain is not designed for data privacy. A ‘distributed' ledger will be used to store the data. Another issue is the immutability of blockchain. Data entered into the ledger cannot be changed or deleted. It will be impossible to remove personal data from the ledger even if desired.
MIT's Enigma Project aims to solve this. Enigma's ‘Secret Network' allows nodes to process data without seeing it. Decentralized applications can use Secret Network to use encrypted data without revealing it.
Another startup, Oasis Labs, uses blockchain to address data privacy issues. They are working on a system that will allow businesses to protect their customers' data.
Conclusion
Blockchain technology is already being used. Several governments use blockchain to eliminate centralized servers and improve data security. In this information age, it is vital to safeguard our data. How blockchain can help us in this matter is still unknown as the world explores the technology.
Alex Bentley
3 years ago
Why Bill Gates thinks Bitcoin, crypto, and NFTs are foolish
Microsoft co-founder Bill Gates assesses digital assets while the bull is caged.
Bill Gates is well-respected.
Reasonably. He co-founded and led Microsoft during its 1980s and 1990s revolution.
After leaving Microsoft, Bill Gates pursued other interests. He and his wife founded one of the world's largest philanthropic organizations, Bill & Melinda Gates Foundation. He also supports immunizations, population control, and other global health programs.
When Gates criticized Bitcoin, cryptocurrencies, and NFTs, it made news.
Bill Gates said at the 58th Munich Security Conference...
“You have an asset class that’s 100% based on some sort of greater fool theory that somebody’s going to pay more for it than I do.”
Gates means digital assets. Like many bitcoin critics, he says digital coins and tokens are speculative.
And he's not alone. Financial experts have dubbed Bitcoin and other digital assets a "bubble" for a decade.
Gates also made fun of Bored Ape Yacht Club and NFTs, saying, "Obviously pricey digital photographs of monkeys will help the world."
Why does Bill Gates dislike digital assets?
According to Gates' latest comments, Bitcoin, cryptos, and NFTs aren't good ways to hold value.
Bill Gates is a better investor than Elon Musk.
“I’m used to asset classes, like a farm where they have output, or like a company where they make products,” Gates said.
The Guardian claimed in April 2021 that Bill and Melinda Gates owned the most U.S. farms. Over 242,000 acres of farmland.
The Gates couple has enough farmland to cover Hong Kong.
Bill Gates is a classic investor. He wants companies with an excellent track record, strong fundamentals, and good management. Or tangible assets like land and property.
Gates prefers the "old economy" over the "new economy"
Gates' criticism of Bitcoin and cryptocurrency ventures isn't surprising. These digital assets lack all of Gates's investing criteria.
Volatile digital assets include Bitcoin. Their costs might change dramatically in a day. Volatility scares risk-averse investors like Gates.
Gates has a stake in the old financial system. As Microsoft's co-founder, Gates helped develop a dominant tech company.
Because of his business, he's one of the world's richest men.
Bill Gates is invested in protecting the current paradigm.
He won't invest in anything that could destroy the global economy.
When Gates criticizes Bitcoin, cryptocurrencies, and NFTs, he's suggesting they're a hoax. These soapbox speeches are one way he protects his interests.
Digital assets aren't a bad investment, though. Many think they're the future.
Changpeng Zhao and Brian Armstrong are two digital asset billionaires. Two crypto exchange CEOs. Binance/Coinbase.
Digital asset revolution won't end soon.
If you disagree with Bill Gates and plan to invest in Bitcoin, cryptocurrencies, or NFTs, do your own research and understand the risks.
But don’t take Bill Gates’ word for it.
He’s just an old rich guy with a lot of farmland.
He has a lot to lose if Bitcoin and other digital assets gain global popularity.
This post is a summary. Read the full article here.
CyberPunkMetalHead
3 years ago
195 countries want Terra Luna founder Do Kwon
Interpol has issued a red alert on Terraform Labs' CEO, South Korean prosecutors said.
After the May crash of Terra Luna revealed tax evasion issues, South Korean officials filed an arrest warrant for Do Kwon, but he is missing.
Do Kwon is now a fugitive in 195 countries after Seoul prosecutors placed him to Interpol's red list. Do Kwon hasn't commented since then. The red list allows any country's local authorities to apprehend Do Kwon.
Do Dwon and Terraform Labs were believed to have moved to Singapore days before the $40 billion wipeout, but Singapore authorities said he fled the country on September 17. Do Kwon tweeted that he wasn't on the run and cited privacy concerns.
Do Kwon was not on the red list at the time and said he wasn't "running," only to reply to his own tweet saying he hasn't jogged in a while and needed to trim calories.
Whether or not it makes sense to read too much into this, the reality is that Do Kwon is now on Interpol red list, despite the firmly asserts on twitter that he does absolutely nothing to hide.
UPDATE:
South Korean authorities are investigating alleged withdrawals of over $60 million U.S. and seeking to freeze these assets. Korean authorities believe a new wallet exchanged over 3000 BTC through OKX and Kucoin.
Do Kwon and the Luna Foundation Guard (of whom Do Kwon is a key member of) have declined all charges and dubbed this disinformation.
Singapore's Luna Foundation Guard (LFG) manages the Terra Ecosystem.
The Legal Situation
Multiple governments are searching for Do Kwon and five other Terraform Labs employees for financial markets legislation crimes.
South Korean authorities arrested a man suspected of tax fraud and Ponzi scheme.
The U.S. SEC is also examining Terraform Labs on how UST was advertised as a stablecoin. No legal precedent exists, so it's unclear what's illegal.
The future of Terraform Labs, Terra, and Terra 2 is unknown, and despite what Twitter shills say about LUNC, the company remains in limbo awaiting a decision that will determine its fate. This project isn't a wise investment.
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Simon Egersand
3 years ago
Working from home for more than two years has taught me a lot.
Since the pandemic, I've worked from home. It’s been +2 years (wow, time flies!) now, and during this time I’ve learned a lot. My 4 remote work lessons.
I work in a remote distributed team. This team setting shaped my experience and teachings.
Isolation ("I miss my coworkers")
The most obvious point. I miss going out with my coworkers for coffee, weekend chats, or just company while I work. I miss being able to go to someone's desk and ask for help. On a remote world, I must organize a meeting, share my screen, and avoid talking over each other in Zoom - sigh!
Social interaction is more vital for my health than I believed.
Online socializing stinks
My company used to come together every Friday to play Exploding Kittens, have food and beer, and bond over non-work things.
Different today. Every Friday afternoon is for fun, but it's not the same. People with screen weariness miss meetings, which makes sense. Sometimes you're too busy on Slack to enjoy yourself.
We laugh in meetings, but it's not the same as face-to-face.
Digital social activities can't replace real-world ones
Improved Work-Life Balance, if You Let It
At the outset of the pandemic, I recognized I needed to take better care of myself to survive. After not leaving my apartment for a few days and feeling miserable, I decided to walk before work every day. This turned into a passion for exercise, and today I run or go to the gym before work. I use my commute time for healthful activities.
Working from home makes it easier to keep working after hours. I sometimes forget the time and find myself writing coding at dinnertime. I said, "One more test." This is a disadvantage, therefore I keep my office schedule.
Spend your commute time properly and keep to your office schedule.
Remote Pair Programming Is Hard
As a software developer, I regularly write code. My team sometimes uses pair programming to write code collaboratively. One person writes code while another watches, comments, and asks questions. I won't list them all here.
Internet pairing is difficult. My team struggles with this. Even with Tuple, it's challenging. I lose attention when I get a notification or check my computer.
I miss a pen and paper to rapidly sketch down my thoughts for a colleague or a whiteboard for spirited talks with others. Best answers are found through experience.
Real-life pair programming beats the best remote pair programming tools.
Lessons Learned
Here are 4 lessons I've learned working remotely for 2 years.
-
Socializing is more vital to my health than I anticipated.
-
Digital social activities can't replace in-person ones.
-
Spend your commute time properly and keep your office schedule.
-
Real-life pair programming beats the best remote tools.
Conclusion
Our era is fascinating. Remote labor has existed for years, but software companies have just recently had to adapt. Companies who don't offer remote work will lose talent, in my opinion.
We're still figuring out the finest software development approaches, programming language features, and communication methods since the 1960s. I can't wait to see what advancements assist us go into remote work.
I'll certainly work remotely in the next years, so I'm interested to see what I've learnt from this post then.
This post is a summary of this one.
xuanling11
2 years ago
Reddit NFT Achievement
Reddit's NFT market is alive and well.
NFT owners outnumber OpenSea on Reddit.
Reddit NFTs flip in OpenSea in days:
Fast-selling.
NFT sales will make Reddit's current communities more engaged.
I don't think NFTs will affect existing groups, but they will build hype for people to acquire them.
The first season of Collectibles is unique, but many missed the first season.
Second-season NFTs are less likely to be sold for a higher price than first-season ones.
If you use Reddit, it's fun to own NFTs.
Trevor Stark
3 years ago
Economics is complete nonsense.
Mainstream economics haven't noticed.
What come to mind when I say the word "economics"?
Probably GDP, unemployment, and inflation.
If you've ever watched the news or listened to an economist, they'll use data like these to defend a political goal.
The issue is that these statistics are total bunk.
I'm being provocative, but I mean it:
The economy is not measured by GDP.
How many people are unemployed is not counted in the unemployment rate.
Inflation is not measured by the CPI.
All orthodox economists' major economic statistics are either wrong or falsified.
Government institutions create all these stats. The administration wants to reassure citizens the economy is doing well.
GDP does not reflect economic expansion.
GDP measures a country's economic size and growth. It’s calculated by the BEA, a government agency.
The US has the world's largest (self-reported) GDP, growing 2-3% annually.
If GDP rises, the economy is healthy, say economists.
Why is the GDP flawed?
GDP measures a country's yearly spending.
The government may adjust this to make the economy look good.
GDP = C + G + I + NX
C = Consumer Spending
G = Government Spending
I = Investments (Equipment, inventories, housing, etc.)
NX = Exports minus Imports
GDP is a country's annual spending.
The government can print money to boost GDP. The government has a motive to increase and manage GDP.
Because government expenditure is part of GDP, printing money and spending it on anything will raise GDP.
They've done this. Since 1950, US government spending has grown 8% annually, faster than GDP.
In 2022, government spending accounted for 44% of GDP. It's the highest since WWII. In 1790-1910, it was 3% of GDP.
Who cares?
The economy isn't only spending. Focus on citizens' purchasing power or quality of life.
Since GDP just measures spending, the government can print money to boost GDP.
Even if Americans are poorer than last year, economists can say GDP is up and everything is fine.
How many people are unemployed is not counted in the unemployment rate.
The unemployment rate measures a country's labor market. If unemployment is high, people aren't doing well economically.
The BLS estimates the (self-reported) unemployment rate as 3-4%.
Why is the unemployment rate so high?
The US government surveys 100k persons to measure unemployment. They extrapolate this data for the country.
They come into 3 categories:
Employed
People with jobs are employed … duh.
Unemployed
People who are “jobless, looking for a job, and available for work” are unemployed
Not in the labor force
The “labor force” is the employed + the unemployed.
The unemployment rate is the percentage of unemployed workers.
Problem is unemployed definition. You must actively seek work to be considered unemployed.
You're no longer unemployed if you haven't interviewed in 4 weeks.
This shit makes no goddamn sense.
Why does this matter?
You can't interview if there are no positions available. You're no longer unemployed after 4 weeks.
In 1994, the BLS redefined "unemployed" to exclude discouraged workers.
If you haven't interviewed in 4 weeks, you're no longer counted in the unemployment rate.
If unemployment were measured by total unemployed, it would be 25%.
Because the government wants to keep the unemployment rate low, they modify the definition.
If every US resident was unemployed and had no job interviews, economists would declare 0% unemployment. Excellent!
Inflation is not measured by the CPI.
The BLS measures CPI. This month was the highest since 1981.
CPI measures the cost of a basket of products across time. Food, energy, shelter, and clothes are included.
A 9.1% CPI means the basket of items is 9.1% more expensive.
What is the CPI problem?
Here's a more detailed explanation of CPI's flaws.
In summary, CPI is manipulated to be understated.
Housing costs are understated to manipulate CPI. Housing accounts for 33% of the CPI because it's the biggest expense for most people.
This signifies it's the biggest CPI weight.
Rather than using actual house prices, the Bureau of Labor Statistics essentially makes shit up. You can read more about the process here.
Surprise! It’s bullshit
The BLS stated Shelter's price rose 5.5% this month.
House prices are up 11-21%. (Source 1, Source 2, Source 3)
Rents are up 14-26%. (Source 1, Source 2)
Why is this important?
If CPI included housing prices, it would be 12-15 percent this month, not 9.1 percent.
9% inflation is nuts. Your money's value halves every 7 years at 9% inflation.
Worse is 15% inflation. Your money halves every 4 years at 15% inflation.
If everyone realized they needed to double their wage every 4-5 years to stay wealthy, there would be riots.
Inflation drains our money's value so the government can keep printing it.
The Solution
Most individuals know the existing system doesn't work, but can't explain why.
People work hard yet lag behind. The government lies about the economy's data.
In reality:
GDP has been down since 2008
25% of Americans are unemployed
Inflation is actually 15%
People might join together to vote out kleptocratic politicians if they knew the reality.
Having reliable economic data is the first step.
People can't understand the situation without sufficient information. Instead of immigrants or billionaires, people would blame liar politicians.
Here’s the vision:
A decentralized, transparent, and global dashboard that tracks economic data like GDP, unemployment, and inflation for every country on Earth.
Government incentives influence economic statistics.
ShadowStats has already started this effort, but the calculations must be transparent, decentralized, and global to be effective.
If interested, email me at trevorstark02@gmail.com.
Here are some links to further your research: