Joshua Ashley Klayman and Alfredo B.D. Silva advise caution when determining whether an ICO is a security in the Crowdfund Insider article “When is an ICO a Security? Law Firm Morrison Foerster Responds.”
“At this time, many potential issuers and others are looking for clarity and assurances of when (and which) tokens will not constitute securities,” Ms. Klayman said. “It is important to remember, however, that, in the absence of on-point SEC guidance of the counter case (such as no-action letters, rule making, etc.), while we can hypothesize about which types of tokens may not be categorized as securities, we presently cannot be sure or offer certainty as to any specific token. Proving a negative generally is a challenge, no matter the question, and one more conservative approach would be to treat tokens as if they were securities unless and until more specific SEC guidance is available.”
“The simple fact is there is no bright line between when a token is and is not a security,” Mr. Silva said. “A multi-factor test applies, and issuers and practitioners must exercise judgment based on the nature of the particular token and the offering in question, with a focus on the economic substance of the transaction. Tokens that look more like stock, bonds and other traditional securities — tokens that entitle the buyer to profit share or specified or potential investment returns based on the business operations of the issuer, for example — are more likely to be classified as securities. On the other hand, tokens that have some intrinsic value to the buyer at the time of issuance and aren’t necessarily intended to be resold or redeemed for greater cash value — like many so-called ‘app tokens’ — may look less like securities and more like assets.”
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