A Securities Law Framework for Blockchain Tokens
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A Securities Law Framework for Blockchain Tokens
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To estimate how likely a particular blockchain token is be a security under US federal securities law
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Refer to: full legal analysis
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Instructions
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Step 1: Copy to a new google sheet (File > Make a copy) or download as .xls
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Step 2: Review each characteristic and determine whether or not it applies to the token
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Step 3: Select Y or N for each characteristic from the drop down menu
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Step 4: Review results at the bottom of this page
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Element 1: Investment of Money
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Is there an investment of money?
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CharacteristicPointsExplanationExamplesY or N
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There is no crowdsale. New tokens are given away for free, or are earned through mining 0Tokens which are not sold for value do not involve an investment of money.

For example, if all tokens are distributed for free, or are only produced through mining, then there is no sale for value.
There was never any token sale for Bitcoin. The only way to acquire new bitcoin is via mining.

A token which is randomly distributed for free
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Tokens are sold for value (crowdsale)100Tokens which are sold in a crowdsale, at any time, regardless of whether sold for fiat or digital currency (or anything else of value) involve an investment of moneyA token which is sold for bitcoin in a crowdsale.

A token which is sold for ether in a crowdsale.
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Total for Element 10
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Element 2: Common Enterprise
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What is the timing of the sale?
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CharacteristicPointsExplanationExamplesY or N
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Pre-deployment70A sale of tokens before any code has been deployed on a blockchain is more likely to result in a common enterprise where the profits arise from the efforts of others. This is because the buyers are completely dependent on the actions of the developers, and the buyers cannot actually participate in the network until a later time.A developer has an idea for a new protocol, writes a white paper and does a crowdsale.
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The protocol is operational on a test network60If there is a functioning network there is less likely there is to be a common enterprise where the profits arisef rom the efforts of others. The closer the sale is to launch of the network, the less likley there is to be a common enterprise.A developer has an idea for a new protocol, writes a white paper and deploys a working test network before doing a crowdsale.
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Live network is operational50If the token is sold once there is an operational network using the token, or sold immediately before the network goes live, it is again less likely to result in a common enterpriseThe crowdsale is done at the same time the network is launched.
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What do token holders have to do in order to get economic benefits from the network?
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CharacteristicPointsExplanationExamplesY or N
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All token holders will always receive the same returns25If returns are paid to all token holders equally (or in proportion to their token holdings) regardless of any action on the part of the token holder, then their interests are more likely aligned in a common enterprise‘HodlToken’ holders are automatically paid an amount of ETH each week, based on fees generated by other users of the network

‘FoldToken’ does not pay any return, and there is no way to earn more tokens within the network (but they can be bought, sold or traded)
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There is a possibility of varying returns between token holders, based on their participation or use of the network-20If token holders’ returns depend on their own efforts, and can vary depending on the amount of effort they each put in, then there is less likely to be a common enterprise‘CloudToken’ holders can earn more tokens by providing data storage on the network, or can spend tokens to access data storage. Holders who do not provide data storage do not earn any more tokens.
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Total for Element 20
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Element 3: Expectation of Profit
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What function does the token have?
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CharacteristicPointsExplanationExamplesY or N
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Ownership or equity interest in a legal entity, including a general partnership100Tokens which give, or purport to give, traditional equity, debt or other investor rights are almost certainly securities. If one or more of these characteristics apply, the token is almost certainly a security, notwithstanding the results of the other elementsA developer releases and sells 100 ‘BakerShares’ tokens. Each token entitles the holder to 1 share in Baker, Inc.

A developer releases and sells 100 ‘BakerProfit’ tokens. Each token entitles the holder to 1% of the profits of Baker, Inc. for the next year.

A developer releases and sells 100 ‘BakerDebt’ tokens. Each token entitles the holder to principal and interest repayments based on the initial token sale price.

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Entitlement to a share of profits and/or losses, or assets and/or liabilities100
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Gives holder status as a creditor or lender100
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A claim in bankruptcy as equity interest holder or creditor100
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A right to repayment of purchase price and/or payment of interest100
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No function other than mere existence100A token which does not have any real function, or is used in a network with no real function, is very likely to be bought with an expectation of profit from the efforts of others, because no real use or participation by token holders is possible.

Voting rights alone do not constitute real functionality.
A developer releases and sells 100,000 ‘SocialCoin’ tokens to fund the development of a new Social Network. However, SocialCoin is not required to access the network and has no real function after the sale.
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Specific functionality that is only available to token holders0A token which has a specific function that is only available to token holders is more likely to be purchased in order to access that function and less likely to be purchased with an expectation of profit.'CloudToken’ is the only way to access and use a decentralized file storage network.
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Does the holder rely on manual, off-blockchain action to realize the benefit of the token?
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CharacteristicPointsExplanationExamplesY or N
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Manual action is required outside of the network (e.g. off-blockchain) in order for the holder to get the benefit of the token80A token whose value depends on someone taking specific manual action outside of the network means that the token is not functional in and of itself. Instead, the token relies on a level of trust in a third party taking action off-blockchain. This sort of token is more likely to be bought for speculation - i.e. the expectation of profits.A developer releases and sells ‘FreightCoin’, which will allow the holder to pay FreightCoin to access capacity on a new real-world freight network. The network relies on legal contractual relationships and manual actions. (This alone does not make FreightCoin a security)
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All functionality is inherent in the token and occurs programmatically0A token which is built with all the necessary technical permissions means that the token holder does not rely on manual actions of any third party. This means that the buyers are more likely to purchase the token for use rather than with the expectation of profit from the efforts of others.Holders of ‘SongVoteToken’ can sign transactions on the network as votes for their favorite new songs and earn rewards for doing so.
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What is the timing of the sale?
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CharacteristicPointsExplanationExamplesY or N
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Pre-deployment20A sale of tokens before any code has been deployed on a blockchain is more likely to result in buyers purchasing for speculative reasons with the expectation of profit, rather than practical use cases.A developer has an idea for a new protocol, writes a white paper and does a crowdsale.
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The protocol is operational on a test network10If the sale occurs after code has been deployed and tested, the token is closer to being able to be usedA developer has an idea for a new protocol, writes a white paper and develops a working test network before doing a crowdsale.
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Live network is operational0If the token is sold once there is an operational network using the token, or immediately before the network goes live, it is more likely to be purchased with the intention of use rather than profit.The live network is launched before the crowdsale.
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Can the token holders exercise real and significant control via voting?
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CharacteristicPointsExplanationExamplesY or N
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Token holders as a whole are able to control the development team’s access to funds-20If the collective approval of token holders is required in order for the development team to access the funds raised in the crowdsale, then any value realized by the token holders is more closely tied to their own decisions, and less reliant on the efforts of others. A development team sells 100,000 Tokens for a total of 100,000 ETH.

50,000 ETH will be released from the token contract to the development team immediately, but the remainder is only released once milestones are met, which requires approval of a majority of the token holders each time. If the milestones are never met, the remaining ETH will be returned to the token holders.
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Token holders as a whole are able to vote on significant decisions for the protocol-10If the collective approval of token holders is required in order to make significant changes to the protocol, then any value realized by the token holders is more closely tied to their own decisions, and less reliant on the efforts of others. Changes to the protocol require a vote by token holders.
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Note: Voting rights must be in addition to functionality. A token with voting rights alone and no other real functionality is very likely to satisfy element 3
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How is the token sale marketed?
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CharacteristicPointsExplanationExamplesY or N
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Marketed as an 'Initial Coin Offering' or similar50It is not possible to prevent some buyers from buying a token purely for speculation. However, marketing the token as an investment leads buyers to believe they can profit from holding or trading the token, rather than from using the token in the network.

Using terms like 'Initial Coin Offering' or 'ICO', and investment-related language like ‘returns’ and ‘profits’ encourages buyers to buy a token for speculation, rather than use.
‘ProfitCoin’ includes potential of ‘high ROI’ and ‘investor profits’ in its marketing material.
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Marketed as a Token Sale0Marketed as a sale of tokens which give the right to access and use the network
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There is no economic return possible from using the network-100If there is genuinely no economic return possible for the token holders, then there is unlikely to be a common enterprise. This will be rare.Backers contribute to a cause and receive a ‘thank you’ token which has no economic value.
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Results
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GuideYour results
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Total PointsHow likely is the element to be satisfied?
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0 or lessVery unlikelyTotal for Element 10
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1 - 33UnlikelyTotal for Element 20
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34 - 66Equally likely and unlikelyTotal for Element 30
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67 - 99Likely
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100 or moreVery likelyOverall Risk Score0
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A token will only be a security if it satisfies all three elements. The higher the point score for each element, the more likely the element is to be satisfied.

For many blockchain tokens, the first two elements of the Howey test are likely to be met. The third element has the most variables and the most different outcomes depending on the characteristics of the particular token.
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Important notes
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Please remember that this methodology produces nothing more than an estimate. The Overall Risk Score and the categories of likelihood are a guide only. The Howey test has not yet been directly applied by the courts to any digital currency or blockchain token. The Howey test as applied by the courts does not involve any points-based calculation. The points system is intended as a guide - to highlight the characteristics of a token which are relevant to the securities law analysis. This Framework should be read together with the full legal analysis. This Framework and the full legal analysis may be updated in the future as the law in this area develops. You should not rely on this Framework as legal advice. It is designed for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses. You should seek advice from your own counsel, who is familiar with the particular facts and circumstances of what you intend and can give you tailored advice. This Framework is provided "as is" with no representations, warranties or obligations to update, although we reserve the right to modify or change this Framework from time to time. No attorney-client relationship or privilege is created, nor is this intended to be attorney advertising in any jurisdiction.
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Last updated December 7, 2016
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This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
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Securities Law Framework