John Gotts explains how to create compliant cryptocurrency, including legal citations, based on his creation of the "stoken" STKN crypto.
20 Shavers, supra note 14, at *5.
21 Id.
22 Compare In re Munchee Inc., supra note 6, at 8-9. 23 We note that STKN appears to be distinguishable from some of the cases we have reviewed analyzing whether the performance of services satisfies the first factor of the Howey test. We believe, for example, that the circumstances of STKN are distinguishable from the case in which a court held that an agreement by non- salaried workers to perform services in return for a share of the profits made from their employer’s mining operations was an investment contract, because Volunteers are not entitled to a share of any profits of the company or otherwise simply by performing services for STKN. See SEC v. Int’l Heritage Inc., 4 Supp. 2d 1378, 1382-83 (N.D. Ga. 1998) (discussing SEC v. Addison, 194 F. Supp. 709 (N.D. Tex. 1961)). 24 SEC v. SG Ltd., 265 F.3d 42, 49 (1st Cir. 2001) (“Courts are in some disarray as to the legal rules associated with the ascertainment of a common enterprise .... Many courts require a showing of horizontal commonality .... Other courts have modeled the concept of a common enterprise around fact patterns in which an investor’s fortunes are tied to the promoter’s success rather than to the fortunes of his or her fellow investors. This doctrine, known as vertical commonality, has two variants[:] . . . [b]road vertical commonality ... [and] ... narrow vertical commonality.”) (internal citations omitted). 25 Id. (citations omitted). See also Wals v. Fox Hills Dev. Corp., 24 F.3d 1016, 1019 (7th Cir. 1994) (noting that a “pooling of profits” is “essential to horizontal commonality.”). 26 DAO Report, supra note 3, at 12. 27 The Stokens Memo envisions that entrepreneurs may seek coins for effort or endeavors and may be inspired by the existence of STKN to invent applications, products, and services that STKN may be used 84169499_5 28 See Jeffrey E. Alberts & Bertrand Fry, Is Bitcoin a Security?, 21 B.U. J. SCI. & TECH. L. 1, 17-18 (2015) (discussing cases); see also Rolo v. City Investing Co. Liquidating Trust, 845 F. Supp. 182, 236 (D.N.J. 1993). Although the Rolo case provides a good window into how a court or agency might consider circumstances similar to those presented by STKN, we would caution against any reliance on this case in a court proceeding or before the SEC, because the Third Circuit vacated the district court’s decision without any explanation. The Third Circuit did not specifically rule that the district court’s analysis related to the definition of a security was invalid. 29 Rolo, 845 F. Supp. at 236. The court in Rolo discussed a number of other federal cases that support this proposition. See Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 10 (1st Cir. 1993) (“[O]ne who buys raw land or even a building, hoping to profit from rents or the natural increase in the value of property, is not under normal circumstances treated as purchasing a ‘security’, and “[c]onventional incidentals, such as the seller’s promise to install a road or electricity, is similarly not enough to elevate an ordinary real estate transaction to the status of a security.”) (citation omitted); Aldrich v. McCulloch Properties, Inc. 627 F.2d 1036, 1040 (10th Cir. 1980) (“[I]f the benefit to the purchasers of the amenities promised by defendants was largely in their own use and enjoyment, the necessary expectation of profit is missing. . . . [T]he obligation to perform minimal managerial functions or to provide basic improvements does not transform a real estate sale into a securities transaction.”); Woodward v. Terracor, 574 F.2d 1023, 1025 (10th Cir. 1978) (“Unlike Howey, [the developer] was not under any collateral management contract with the purchasers of its land. In short, the record in the instant case simply shows the purchase by the plaintiffs of lots in a real estate development.”); Davis v. Rio Rancho Estates, Inc., 401 F. Supp. 1045, 1050 (S.D.N.Y. 1975) (The developers “did not promise to run the development and distribute profits to the plaintiff, as did the operators of the orange groves in Howey. There was no management contract between plaintiff and defendants, nor were defendants obligated by the Purchase agreement to perform any such services. . . . [T]he expectation of a profit on resale is insufficient to transform what is essentially a sale of real property into the sale of an investment contract[.]”) 30 Alberts & Fry, supra note 28, at 18 (citing Rolo, 845 F. Supp. at 236). 31 Id. (citing Brodt v. Bache & Co., Inc., 595 F.2d 459, 462 (9th Cir. 1978)). 32 As discussed, we understand that the Founder intends to operate a separate and distinct business of consulting software entrepreneurs. 33 SG Ltd., 265 F.3d at 49 (noting “[b]road vertical commonality requires that the well-being of all investors be dependent upon the promoter’s expertise.”). 34 See Alberts & Fry, supra note 28, at 18. Compare Shavers, supra note 14, at *5 (“[T]he investors here were dependent on Shavers’ expertise in Bitcoin markets and his local connections,” and “Shavers allegedly promised a substantial return on their investments as a result of his trading and exchanging Bitcoin.”). 35 Cases involving developers who sell real estate in unfinished common developments are also instructive in the context of applying the broad vertical commonality test to the circumstances of STKN. See, e.g., Rodriguez, 990 F.2d at 11-12 (buyers of undeveloped real estate were not part of common venture with developer, because “apart from the promise of an existing lodge or a new country club, the evidence did not show that the promoter or any other obligated person or entity was promising the buyers to build or provide anything”); Woodward, 574 F.2d at 1025 (buyer of real estate from a developer did not form a “common venture or common enterprise” with the developer because the developer “was under no contractual obligation to the plaintiffs other than deliver title once the purchase terms were met” and had no “collateral management contract with the purchasers”); see also Alberts & Fry, supra note 28, at 18-19 (“Courts have repeatedly adopted similar logic in instances where a developer sells plots of land based on representations that the developer will finish a land development, but will not continue to manage it after initial development is complete.”). Here, the Founder of STKN, like the developer selling plots of land, stated clearly (and made no commitment and entered no agreement) that the Company would continue to manage the blockchain after the initial development was complete. 36 SG Ltd., 265 F.3d at 49 (quoting SEC v. Glenn W. Turner Enters., 474 F.2d 476, 482 n.7 (9th Cir. 1973)). 37 SEC v. Eurobond Exch. Ltd., 13 F.3d 1334, 1339 (9th Cir. 1994). 38 Id. 39 To the extent a court were to adopt the “strict vertical commonality” approach, there is some risk that it could focus on the fact that the Founder has allocated himself Coin and will therefore retain a significant interest in STKN’s development and success. The Company and Founder may plausibly argue that their interest as holders of STKN are no different (or are pari passu) to any other holder. The argument is bolstered if these parties factually refrain from managing the STKN blockchain, and pursue their business without regard to changes in value in STKN. 40 Howey, 328 U.S. at 299.
41 United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852 (1975). 42 See, e.g., Glenn W. Turner Enters., 474 F.2d at 482. You can follow me here at JohnGotts.com as well at: · instagram.com/johngotts · johngotts.blogspot.com · johngotts.wordpress.com · linkedIn.com/in/johngotts · twitter.com/john_gotts · medium.com/@johngotts · facebook.com/johnwgotts #johngotts John Gotts...
