6 Key Differences Between Security and Utility Tokens

Justin Chan
Apr 8, 2018 · 9 min read
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  1. What is the company’s marketing effort focused on? Is a significant chunk of its online literature (for example, in forums, Facebook and on its website) directed at investors and the crypto-community? If so, this should raise concerns that the token is a security, and regulatory intervention is likely to be just around the corner. But if the company is instead focused on trying to attract people to use its platform, is not using wording focused on earning profits, and instead discusses the functionality of the token, then the project’s legitimacy is likely to be more convincing.
  2. Don’t rely on a SAFT framework: A Simple Agreement for Future Tokens (SAFT) is an investment contract provided by the project’s developers to accredited investors. The framework aims to assert that when tokens are issued to investors in an ICO, they have utility such that they are not considered securities and can thus be sold to investors in the secondary cryptocurrency market. But investors should not simply assume that having a SAFT in place makes the company compliant. In the Munchee case, the SEC concluded, “Even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security. Determining whether a transaction involves a security does not turn on labelling — such as characterizing an ICO as involving a ‘utility token’ — but instead requires an assessment of ‘the economic realities underlying a transaction.”
  3. Beware of companies seeking to put tokens on exchanges: If a company purports to issue a utility token, but is also making clear efforts to eventually post their token on an exchange either by themselves or through a third party, this should raise a red flag. As Clayton remarked in the wake of the SEC’s Munchee order, having tokens on exchanges and marketing their transferability strongly implies that such tokens are securities.
  4. Does published content state or suggest that investors can earn a profit? Online content from the company posted on blogs, forums, social media platforms, or endorsing other third-party content (such as cryptocurrency ‘pundits’ on YouTube) suggesting that gains can be realized from purchasing the company’s tokens, should concern investors. Indeed, Munchee published a blog post which stated that “As more users get on the platform, the more valuable your MUN tokens become.” The company also posted a link to a YouTube video which encouraged investors to participate early in the ICO as they would make a profit.
  5. Regulators can intervene at any time: Just because a token sale has commenced does not mean that regulators won’t shut down the event at a later stage. Again, Munchee provides an ideal illustration of this point, with the SEC issuing its cease-and-desist order one day after the token sale had commenced.
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Justin Chan

Written by

founder of datadriveninvestor.com where expertise and network generate value. justinchan@datadriveninvestor.com

Data Driven Investor

from confusion to clarity not insanity

Justin Chan

Written by

founder of datadriveninvestor.com where expertise and network generate value. justinchan@datadriveninvestor.com

Data Driven Investor

from confusion to clarity not insanity

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