Is a three year safe harbor for digital tokens necessary for developers to determine if security law type disclosures are required when selling it? This is the question initially raised by Commissioner Hester M. Peirce in February 2021 and reiterated earlier this week by Commissioners Peirce and Elad Roisman (here). The suggestion was made at the time the Commission accepted the settlement offer in In the Matter of Blotics Ltd. f/d/b/a Coinschedule Ltd., Adm. Proc. File No. 3-20398 (July 14, 2021), a case centered on a popular website platform that publicized offerings of digital tokens.

Commissioners Peirce and Roisman agreed that selling securities without making the necessary disclosures violates Securities Act Section 17(a), the basis for the settlement in Coinschedule. There the company consented to the entry of a cease-and-desist order based on Securities Act Section 17(a) and agreed to pay disgorgement, prejudgment interest and a penalty totaling $154,434.00. The two Commissioners expressed concern regarding the clarity of the guidance available from the agency on which coins constituted a security on the platform: “There is a decided lack of clarity for market participants around the application of the securities laws to digital assets and their trading, as is evidenced by the requests each of us receives for clarity. . .”

Clarity is a key point when applying legal principles. Precisely what is unclear about the application of the investment contract test of SEC v. W.J. Howey Co., 328 U.S. 293 (1946) to digital assets is not specified in the comments however. Just why sellers of digital assets or coins should get a three year safe harbor to assess if under Howey those assets constitute a security is also not specified.

The Howey test is straight forward: The pooling of investor capital on the expectation that profits will be made through the efforts of others constitutes an investment contract, a security. Accordingly, if the point of the investment – a digital asset or otherwise – is to combine the investor capital with that of others and make money from the work of others, it is an investment contract.

The Howey test is hardly new. The decision has been on the books since 1946 – over 60 years. During that time, numerous court decisions have applied the test. And for those concerned about digital assets, the Commission issued the DAO report of an investigation centered on digital assets in July 2017. The report applied Howey to digital assets, adding clarity to the point. The DAO report is not mentioned by the Commissioners.

Also missing from the suggestion that crypto coin sellers should get a three year pass from complying with the securities laws is a rationale for the need for such a safe harbor. There is nothing unique about newly minted coins or digital assets that may be tied to a blockchain which would require three years to figure out if the Howey test applies. Indeed, none of the sellers of investment contracts over the last six decades since Howey was decided have had years to assess if they should comply with the decision.

While members of the public may express confusion about whether a digital asset is an investment contract, the confusion stems from not from Howey but from failing to recognize the key point. A digital asset in and of itself is not a security. It is the investment contract tied to it that is the security — no investment contract, no security. The same is true for corporate stock. Neither the paper certificate issued by the public company nor the digital manifestation of that certificate on the books of the transfer agent is the stock or the security. The certificate or digital record are each records reflecting that the stock was issued.

The corporation does not need a three year safe harbor to determine if the stock issued for the investor’s money is a security. The transfer agent does not need three years to determine if the electronic record it has reflecting an investment in a company means the investor purchased stock, a security. And, those involved with digital assets do not need three years to determine if they received money from an investor based on claims that the money would be pooled with funds from other investors and hopefully return a profit in the future from the work of others is an investment contract, a security. It is.

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The SEC has long focused on insider trading — it is an enforcement priority. As last week drew to a close, the Commission filed two new insider trading cases. The first it a good example of a classic insider trading case. The second is also an insider trading case – perhaps, it has trading and may also have actual material nonpublic information or inside information, but perhaps not.

SEC v. Watson, Civil Action No. 1:21-cv-05923 (S.D.N.Y. Filed July 9, 2021) is an insider trading case that names as defendants Eric Watson, Oliver-Barret Lindsay and Gannon Giguiere. Mr. Watson was the controlling shareholder and a corporate insider of Long Island Iced Tea Corporation, now known as Long Blockchain Corporation. He is also a securities law recidivist, having settled insider trading charges with the Commission in 2001 and pleaded guilty to a conspiracy charge in a manipulation case in 2019. Defendant Lindsay is a Canadian citizen who is an exempt broker registered in the Cayman Islands. Defendant Gannon Giguiere is a friend and associate of Mr. Watson, having engaged in market manipulation activities with him in the past. Both men were charged by the Commission in 2016 with market manipulation.

In late 2017 Defendant Watson told Mr. Lindsay that Long Island Iced Tea was planning to change its name and line of business. The announcement would be issued shortly.

Subsequently, on December 20, 2017 Mr. Lindsay told his friend, Defendant Giguliere, that Long Island Iced Tea planned to change its name to its current form. In connection with the renaming, the company planned to remake itself and its line of business. Within hours of the conversation Mr. Giguiere purchased 35,000 shares of Long Island Iced Tea stock.

The next day the company published an announcement stating the going forward the firm would engage in a new line of business. Specifically, the announcement stated in part that Long Island Iced Tea was “shifting its primary corporate focus toward the exploration of and investment in opportunities that leverage the benefits of blockchain technology . . .” The firm also planned to change its name to Long Blockchain Corporation, according to the December 21, 2017 announcement.

Following the announcement, the firm’s share price increased by 388% compared to the prior day’s close on large volume. Two hours after the announcement Mr. Giguiere sold all of his Long Island Ice Tea shares, reaping $162,500 in illicit profits. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The Commission also revoked the registration of the company under Exchange Act Section 12j.

SEC v. Trovias, Civil Action No. 1:21-cv-05925 (S.D.N.Y. Filed July 9, 2021) is also an insider trading case. Defendant Apostolos Trovias is a citizen of Greece. His last known residence is in that country. Since 2016 he has maintained vendor accounts on several Dark Web marketplaces where he is known as The Bull.

Beginning in 2016, and continuing until 2021, Mr. Trovias offered to, and did sell, what he claimed was inside information on the dark web. In part, The Bull claimed his tips came from order-book data from a securities trading firm. The statement was either false and misleading or, if true, a violation of his obligations in handling inside information. The market book tips were marketed through weekly and monthly subscriptions and as one-off assets. Mr. Trovias had over 100 subscriptions.

Defendant also sold pre-release earnings reports of publicly traded companies. The information was inside information. His customers included undercover Internal Revenue Service and Federal Bureau of Investigation special agents. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action.