2023 Is Not The Year We Change The Rules, It’s The Year We Play By Them
By Anayansy Hernandez
2022 will be remembered as the year the world realized there are consequences for launching unregistered securities. The SEC doubled down on regulatory oversight and went after those not following the rules.
The confusion between what can be considered a commodity or security became so prominent that senators Cynthia Lummis and Kirsten Gillbrand introduced the bi-partisan Lummis-Gillibrand Responsible Financial Innovation Act in June of 2022.
The bill, if passed, will classify what a commodity is, which of the US departments will have oversight over commodities, and it will also give investors protections on their investments, among other things.
All the changes happening in congress around digital securities created frustration especially when companies such as Ripple were sued.
Which brings us to the point: we don’t need a change in rule, we just need companies to play by them. The SEC is very specific about what is considered a security — the Howey Test shows that. Additionally, the SEC’s guidelines on how to issue securities are very straightforward. However, companies are still failing to adhere to these rules and they face some common themes in their cases:
- Their cryptocurrency has been deemed an “investment contract” by the SEC.
- The promotion and marketing of the coin itself has given the belief there will be an expectation of profit.
These two themes have been common among XRP (Ripple’s token), FTT (FTX’s exchange token and LBC (LBRY Inc Token).
XRP- Ripple
In this specific case, the SEC is claiming Ripple has been conducting a $1.3 billion unregistered securities offering since the token’s creation. Meanwhile Ripple is arguing that the “SEC is asking the court to rewrite the statutes that define its authority.” The case has yet to reach a verdict, but nonetheless it will shape how digital assets are looked at.
The XRP tokens were used to fund Ripple’s platform and also enriched the platform’s management. In the SEC’s eyes the token is deemed a security because:
- It was purchased by investors who assumed they were investing in a joint venture.
- Due to Ripple’s marketing efforts and supply manipulation, investors believed the price of the token would increase due to the company’s activities.
FTT — FTX’s Exchange Token
FTX’s marketing made investors believe they will gain a profit from their investment. The company mentioned they would use proceeds from their token sale to fund the growth and development of FTX and also used language to emphasize the token was an investment with profit potential.
FTT’s whitepaper described the FTT token as “the token empowering the FTX ecosystem.”
This promotion led the public to expect growth in FTX appreciation in the value of FTT.
Their CEO Sam Bankman-Fried promoted the token and misguided its investors. As show below:
FTX also had a “buy and burn” program, an initiative used by many other exchanged tokens. This program meant that revenue from FTX would repurchase and burn FTT making the value of the token increase.
- Aspen Digital is a great example of a company that took some measurable steps to disclose information related to their buyback program such as discussing how they were doing it, how much they planned on buying back and over what period of time.
- They also said “The Program will be subject to Company internal policy prepared by legal counsel in accordance with applicable regulatory requirements.” In their press release and included the CAUTION ABOUT -FORWARD LOOKING STATEMENTS. Read more about their program here
LBC Token- LBRY Inc
The LBC Token enabled token holders to access video and other digital content on the LBRY Network. The company claimed that purchasers of the token expected to use them and not hold them as an investment. The company, however, made public and private posts that highlighted the value proposition of the token for potential investors. Investors were under the impression that as the LBRY Network increased so would their investment, hence making it a reasonable expectation of profit under the Howie Test guidelines.
Key Takeaways
- The SEC sought out these companies because they marketed their tokens as a potential investment.
- It did not matter that the tokens had a utility to them.
- “Buy and burn” programs also lead the government to believe the companies had an unregistered security since it caused the value of the token to increase.For more information on buybacks check out episode 162’s main topic of the Security Token Show.
- The tokens that promoted the profit raised from them would be used to grow the company gave the impression that the token holder’s value would increase as well.
To summarize, 2022 was the year we all learned there are repercussions for not following the guidelines, which is why 2023 is all about playing by the rules. If you are not sure where your token stands regarding these guidelines, reach out to Security Token Advisors, the leading experts in the security token space, and ask about their remediation services.
Get in touch with Anayansy
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Disclosures; Nothing in the site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. All investments are highly speculative in nature and involves substantial risk of loss.
