A judge’s decision to depose former Securities and Exchange Commission director William Hinman in the case of the SEC vs, Ripple Labs has the cryptocurrency industry talking, so now is a good time to revisit Hinman’s comments as a refresher.
Hinman made the comments at the Yahoo Finance All Markets Summit in San Francisco. The complete text can be found here.
He began his speech by asking if a digital asset originally presented in a securities offering later be sold but not as a security. If the digital asset represents a set of rights giving the holder a financial interest in an enterprise, there likely is no case. But if the digital asset is sold to be later used to purchase a good or service through the network that created it, Hinman said it could not be considered a security.
Hinman was bullish on distributed ledger technology’s ability to share information, transfer value and record transactions.
“There is real value in creating applications that can be accessed and executed electronically with a public, immutable record and without the need for a trusted third party to verify transactions,” he said in 2018.
Back then many tokens being offered were exactly the same as a conventional securities offering, Hinman said. People bought in early with the hope of cashing out as the system is developed and further utility is added. In those cases it was easy to apply the Howey Test, he said, before explaining its origins in an orange grove scheme. Like in the Howey case, tokens were sold to investors unlikely to actually use them on any closed ecosystem.
“I believe some industry participants are beginning to realize that, in some circumstances, it might be easier to start a blockchain-based enterprise in a more conventional way,” Hinman said. “In other words, conduct the initial funding through a registered or exempt equity or debt offering and, once the network is up and running, distribute or offer blockchain-based tokens or coins to participants who need the functionality the network and the digital assets offer.
“This allows the tokens or coins to be structured and offered in a way where it is evident that purchasers are not making an investment in the development of the enterprise.”
Hinman also asked several interesting questions, including:
Is there a person or group that has sponsored or promoted the creation and sale of the digital asset, the efforts of whom play a significant role in the development and maintenance of the asset and its potential increase in value?
Has this person or group retained a stake or other interest in the digital asset such that it would be motivated to expend efforts to cause an increase in value in the digital asset? Would purchasers reasonably believe such efforts will be undertaken and may result in a return on their investment in the digital asset?
Has the promoter raised an amount of funds in excess of what may be needed to establish a functional network, and, if so, has it indicated how those funds may be used to support the value of the tokens or to increase the value of the enterprise? Does the promoter continue to expend funds from proceeds or operations to enhance the functionality and/or value of the system within which the tokens operate?
Are purchasers “investing,” that is seeking a return? In that regard, is the instrument marketed and sold to the general public instead of to potential users of the network for a price that reasonably correlates with the market value of the good or service in the network?
Is token creation commensurate with meeting the needs of users or, rather, with feeding speculation?
Are independent actors setting the price or is the promoter supporting the secondary market for the asset or otherwise influencing trading?
“These are exciting legal times and I am pleased to be part of a process that can help promoters of this new technology and their counsel navigate and comply with the federal securities laws,” Hinman concluded.