A Cryptocurrency by Any Other Name May Still Smell Like a Security

Dror Futter, Partner, Rimon, P.C.

Although the U.S. Securities and Exchange Commission (SEC) has been studying blockchain and cryptocurrencies since 2013, until its recent pronouncement, the SEC had been silent with respect with respect to its regulatory authority with respect to Initial Coin Offerings. An Initial Coin Offering (“ICO”) is a company’s release of its own cryptocurrency in exchange for tokens of a pre-existing cryptocurrency (e.g., bitcoins and in rare instances, a fiat currency – currency backed by the issuing government such as Dollars or Euro). The ICO issuing company effectively ‘sells’ a pre-defined number of coins or crypto-tokens to purchasers.

The surge in ICO’s has been so dramatic, that in 2017 ICO’s surpassed venture capital as the primary source for funding blockchain ventures and recent news reports suggest that funds raised through an ICO were “crowding out” venture investors. Most ICO’s in the United States have been conducted without registration under U.S. securities laws. Typically, the issuer simply provides potential investors with a “White Paper” outlining how they intend to use the money raised by the ICO.  To put it charitably, the quality and detail of these White Papers varies widely.

The similarity between the term “Initial Coin Offering” and “Initial Public Offering” or IPO is more than coincidental and these similarities have now prompted the SEC to issue its first pronouncements on the subject of ICO regulation under the securities laws and on July 25, 2017, the SEC did just that and issued the following three documents:
• An SEC Report of Investigation;
• A Press Release about the report; and
Guidance to Purchasers of Digital Tokens

The issue the SEC has been grappling with is the application of the definition of a “security” to the tokens being issued in an ICO.  In a 1946 Supreme Court case Securities and Exchange Commission v. Howey Co., the U.S. Supreme Court identified four criteria (which have evolved a bit since that decision) that need to be present for an investment contract, within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, to be a security.  They are: (1) the investment of money or other consideration, (2) In a common enterprise (although there is a split over how “commonality” should defined), (3) where investors expect a profit, and (4) any returns to the investors are derived solely from efforts of the promoters (issuers) or other third parties. The Court noted that the facts and circumstances of each case will determine whether an instrument is a security, even if it does not technically fall within the narrow criteria of their specific decision.

In short, the SEC press release stated:
• Tokens offered and sold by “The DAO” (the case that had been investigated) were securities, subject to the federal securities laws;
• Issuers of blockchain technology-based securities must register offers and sales unless a valid exemption applies;
• Those participating in unregistered offerings may be liable for securities law violations; and
• Securities exchanges enabling trading in these securities must register unless an exemption applies.

The SEC’s documents are silent on so-called “utility tokens” or “service tokens” – tokens that allow the purchaser to obtain a service (e.g., data storage; online games) and it is likely we will hear more from the SEC in future, since their press release contained a clear warning the securities laws and regulations apply to ICO’s. Although not all tokens sold in an ICO will automatically be considered a security, there remains significant uncertainty and most knowledgeable attorneys in this arena have already been advising their clients to avail themselves of the exemptions to the registration requirements (e.g., Reg D, Reg A+ or Crowdfunding under the JOBS Act).

This is an extremely complex and challenging (and evolving) area of the law and regulation and you can read the entire Client Alert: Casting Light Over Recent Events Concerning the SEC’s views on ICOs, Cryptocurrencies, Tokens, Securities and their Legal Repercussions.  Of course, if you want to know even more or need guidance, you should contact Dror Futter directly and you can always contact me, Joe Rosenbaum, or any of the attorneys at Rimon Law with whom you regularly work.

Entertainment Media Crowd Funding Oscar (No, Not That One)

In 1918 there were no Academy Awards. But there was another Oscar! Oscar Micheaux, who taught us something about financing media and entertainment projects – perhaps the first crowd funding entrepreneur in the publishing and motion picture industry.

If you would like to know more about crowd funding and what’s new and what’s next (and about Oscar), you can read about it in Volume 25, Issue 3 of the Entertainment Law Review, where an article about crowd funding, authored by Joseph I. Rosenbaum, was first published by Sweet and Maxwell in London (a Thomson Reuters (Professional) UK Limited company.

You can read Joe’s entire article or download the PDF for your own personal use (i.e., not for redistribution) right here: Crowd Funding – A Funny Thing Happened on the Way to the Investment Bank. [PDF]

As always, if you want to know more about Crowd Funding (or any other matter requiring legal representation, counsel or guidance, please contact me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.

Crowd Funding. Apologies, William Wordsworth

“I wandered lonely as a cloud
That floats on high o’er vales and hills,
When all at once I saw a crowd,”

. . . and so begins the beautiful and timeless poem by William Wordsworth. Although Wordsworth’s crowd was a host of golden daffodils, the crowds most of us have been hearing about lately are either crowd sourcing (check out When Online Games, Health & Life Sciences and Crowd Sourcing Combine) or crowd funding – the subject of this post.

In today’s world, according to the Wikipedia definition, “crowd funding” refers to the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.”

There remains some confusion in the marketplace as to the mechanisms by which the crowds’ funds are made available to business ventures, film promotion and production, worthy causes, and civic organizations. Contrary to what many may believe, it is currently not legal to solicit, offer or otherwise make available any form of securities or equity investment (I’m over-simplifying, but that is the net effect) through online, crowd or other web-based funding schemes. In other words, you can’t raise equity or solicit investments through crowd funding that provide the expectation of profit or the risk of loss of capital investment – in much the same way the traditional stock markets function when they allow individuals to purchase and sell securities.

It is true that the U.S. Securities Exchange Commission has been talking about promulgating regulations aimed at legitimizing, with regulation and oversight, the use of crowd funding as an investment opportunity (and the SEC has publicly announced that it hopes to have the regulations released for comment this fall). But until the regulators promulgate rules and enable it, you can’t “invest,” and businesses and other ventures can’t “raise capital,” through equity or securities offerings through crowd funding.

So what’s the buzz about. Well, first it combines “power to the people” with “put your money where your mouth is” in ways unheard of prior to the Internet! Second, there are still opportunities to raise capital from the public in ways that aren’t illegal and don’t involve equity or securities. Currently, there are four major categories of crowd funding activity. To wit:

I am a musician (not really, it’s just an example) and I tell you that if you pay me $1,000, I will write a song to or about you. If you pay me $5,000, I’ll not only write the song, but if I’m nominated for a major music award (e.g., Grammy, VMA, CMA), I’ll get you two tickets to the awards show. That is referred to as the ”rewards” model of crowdfunding.

Next is the ”pre-payment” model. Please send me $5 and when the song is completed, but before it’s released and available to the general public for $7, I will send you a copy. If I offer to autograph it for another $3, I’ve combined the pre-payment and rewards model.

Then there’s the cause-related model. Listen, I am talented and you love good music, but I’m starving. Please just send me $10 so I can eat, rent recording studio time, and try to publish and distribute my music. Pure online begging – there is no expectation of anything in return.

Last, but not least, the ”loan” model. Please help finance the production of my music, my tour (I’ll send you a T-shirt) and just lend me some money. I promise to pay you back when I start making money – but, WITHOUT interest. There must be no expectation that anyone who lends money will make a profit (interest) on the loan. While there may still be lending laws that apply as to how this is done, it won’t trigger the prohibitions under securities’ laws, as long as you don’t pay interest.

In conclusion, while there are some high-profile examples of projects that have raised millions through crowd funding, most do not – at least not yet. In fact, most commercial ventures raise very little through crowd funding. In the words of Wordsworth: “A poet could not but be gay, In such a jocund company. I gazed – and gazed – but little thought, What wealth the show to me had brought.”

What You Don’t Know Can Hurt You

Multiple Choice Question: What do the following have in common:

“Privacy & Data Protection: Distinctions Between Surveillance and Secrecy”

“Ethics, Process, Privilege, Discovery and Work Product in the Digital Age”

“When Worlds Collide: Old Ethics and New Media”

“Outsourcing: The Law & Technology”

“The Changing Legal Landscape: Evolution or Revolution”

“Growing Your Business Internationally – What to Know Before You Go”

“Social Media, Mobile Marketing, Clouds and Crowds: (modules)

  • Advertising & Marketing in a Digital World
  • Media & Entertainment: Digital Rights and Wrongs
  • Financial Services, Payments & E-Commerce
  • Online Gaming, Gambling & Virtual Worlds
  • Apps & M-Commerce
  • Context & Geo-Marketing: Wi-Fi, Bluetooth, SMS, RFID, QR Codes & Augmented Reality
  • Operations & Performance, Security, Compliance and Interoperability
  • Wired & Wireless: Sweepstakes, Contests, Product Placement & Branded Entertainment
  • Anti-Social? Communication & Public Relations for Companies, Employees & Investors
  • Behavioral Advertising, Endorsements, Blogs, Buzz, Viral, Street Teams & Word of Mouth
  • Labor & Employment Policies in a Networked Age: The Good, The Bad & The Ugly
  • Crowd Sourcing, Crowd Funding, Crowd Investing: Today & Tomorrow

“Privacy, Data Protection & Globalizing Technology: Digital Commerce Brings Legal Challenges”

“Comparative Advertising Issues: Multinational Brands; Global Challenges”

“Direct to Consumer: Legal Challenges in the Digital Marketplace”

“Out of Control? Challenges to Privacy & Security in a Big Data World.”


Answers: (a) Seminars & Presentations Given; (b) Seminars & Presentations Available; (c) Targeted at Lawyers; (d) Targeted at Commercial and Business Management; (e) Relevant to Small-to-Medium Size Business; (f) Relevant to Multinational, International & Global Companies; (g) None of the Above; or (Y) All of the Above.

If you guessed (Y), you are correct. Let us know if any of these, a combination of these or a customized version of these or any other presentations might be right for you. Hey, you never know, but what you don’t know, can hurt you. For more information, contact me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.

Videogame Advertising to Hit the $1 Billion Mark

According to a report in Media Week, advertising spending for advertising in videogames will reach about $1 billion by 2012. Advertising in video games can take a number of forms: in-game advertising, which is preformatted ads that appear within the game itself; advergames, which are games constructed around a particular brand or product in order to highlight and promote that product or brand; context-sensitive or dynamic advertising, which is similar to in-game advertising, but rather than static advertisements, can be contextually modified in a number of ways depending on when, where and how the in-game scene is viewed. Most of that growth is projected in the casual, online, web game world catering to a broader audience than hard core console gamers. The logic is that people are more willing to accept advertising in return for free game playing on the web; and absent a dynamic Internet connection with more user acceptance than is evidenced to date, console gaming provides fewer opportunities for placing context sensitive or behavioral advertising.

Video Games Become a Taxing Subject

Did you know that Louisiana offers a 20 percent tax credit against expenditures for video game developers and certain other interactive digital media companies that are based there? This digital media tax credit is not unique to Louisiana. In 2005, Atlanta began a program of providing tax incentives to digital media, and a number of other places have begun to attract development using tax incentives as well.