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Geeking out on the SEC decision

July 28, 2017

Responding to a comment on linkedin.

Perhaps one of the most notable elements of the release was the fact that the SECdidn’t issue a blanket characterization for blockchain tokens as securities – rather, it said that those determinations would be made on a case-by-case basis, with some falling in that definition others outside it.

This is how securities law in the United States works.  One reason is that it turns out to be extremely difficult and time consuming for a US Federal agency to issue a general rule.  In order to issue a general rule, a US administrative agency has to go through a time consuming process in order to seek out opinions before issuing the rule.  After issuing the rule, it is almost certainly going to be subject to a court challenge.

What the SEC did in this particular situation was to issue an “investigative report” that describes what it’s logic is.  Since it’s an “investigative report” and not a rule or an enforcement action, you can’t really challenge the findings of the report since the SEC really hasn’t done anything.

Now what you can do is to challenge the legal logic in the report.  However, that turns out to be very difficult to do since the legal logic is pretty solid.  The principles that the SEC used in the report were set up by the US Courts, and in some situations by the Supreme Court of the United States.  It’s going to be very, very difficult to overturn those decisions, and one important point is that for things like the “definition of securities” those are set up by the courts, and the SEC has to follow them even if it doesn’t like them, and there are numerous examples of the courts overruling the SEC.

One important thing about the report is that it only talks about half of the story.  It’s pretty clear that the DAO was a security under US law, but that seemed pretty clear before the report was issued.  The question is “now what?”  At that point you turn to Regulation S, which describes whether foreign securities are to be registered.  Going through the logic of Regulation S, it seems pretty clear to me that the DAO would be exempt from registration, although there is enough wiggle room so that one could argue either way.

Now even if the DAO doesn’t fall exactly under Regulation S, that’s not the end of the story.  Regulation S is a “safe harbour” regulation, which is to say that the SEC has stated that if you fall exactly into the requirements of Regulation S, you are perfectly safe from enforcement action.  The thing about that is that even if you don’t fall exactly in the safe harbour, I would argue that you are close enough so that there is good chance that if the SEC ever decided to take this to court with an enforcement action, that you could argue that you are covered by an exemption, even if you aren’t exactly in the safe harbour.

Something about administrative law is that there are some parts of it that are rock hard in concrete, some parts that are somewhat flexible, and some stuff that is really, really flexible.  One thing about the SEC report (and in US law, it’s important that this is a report and not a ruling) is that they focused on the areas which are very, very clear and not under much dispute, while probably intentionally avoiding the parts that aren’t very clear.



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