In a recent article, the details of the ‘In re Tezos Securities Litigation’ case were brought to light, articulating the peculiar situation of US securities laws. The case ruled that the Tezos initial offering was in fact a securities offering, with one reason including the location of nodes that validated payment for the tokens.
The Cloudy Regulatory Framework of Tokenized Securities
One of the most ambiguous areas of blockchain technology entails regulatory compliance. When is a token classified as a security? Which investors are eligible to participate in securities tokens offerings? What criteria are used to answer such questions?
Even U.S. Congress is confused— they’ve asked the SEC to clarify an official security token classification. ESMA— Europe’s securities watchdog— was also recently asked to delineate its definition of a ‘transferable security’ for the sake of clearer security token regulations.
Much of this depends on location, where various regulatory bodies have geographically-confined jurisdictions. Even so, the SEC has recently worked with the FBI to seize and effectively shut-down a Marshall Islands-based online trading platform, making matters even more confusing.
A recent article published in the Harvard Law School Forum on Corporate Governance and Financial Regulation has provided valuable insight concerning the territorial— or extraterritorial— reach of regulators in determining tokenized securities.
Before delving into the details, it is imperative to keep one thing in mind which the article’s analysis could suggest: The United States is in a unique position to allow for US-based Security Token Offerings (STOs) by establishing a precedential regulatory framework for others to follow around the globe. The following will explain how.
How the US Court Ruled the Tezos Offering a Security
The case involved a class action lawsuit— In re Tezos Securities Litigation— in which investors alleged that tokens sold during Tezos’ initial offering were classified as securities.
The most interesting aspect of the case involves the criteria used by the court to make its ruling. According to the authors, “the court formulated a US federal securities law extraterritoriality analysis that— for what we believe is the first time ever— specifically takes the unique characteristics of blockchains into account.”
It’s important to remember that a plurality of characteristics were used in the ruling. As the court stated,
“While no single one of these factors is dispositive to the analysis, together they support an inference that alleged securities purchase occurred inside the United States…”
In total, there were four primary factors which deemed the Tezos token a security: 1) US investors purchased Tezos tokens, 2) tokens were purchased on a website which was hosted in the US and managed by a person in the US, 3) a marketing campaign specifically targeted US residents, and 4) payments for tokens were made in Ether and were validated by a network of Ethereum nodes which were more densely located in the US than any other country.
The last aspect was overwhelmingly deemed the most surprising. The ruling ultimately means that in the future, compliant token offerings are likely to consider more than mere offering and investor locations. Now, enterprises will have to examine where their blockchain’s nodes and— if applicable—even miners are located.
The SEC and its Unique Situation at the Forefront of the Security Token Industry
At first glance, one could emphasize the negative potential of such a finding for the future of token offerings in the US: much business could look for grounds outside the US to launch their offerings. US-based miners and node operators could be restricted from popular blockchains. Such an effect would certainly hinder the quickly developing blockchain industry throughout the US.
While all of that may be accurate, the inverse is also true. The United States— and the SEC— are in a novel position. Right now, they possess the potential to lay the groundwork for global regulatory bodies to follow, and to secure the US as a hotbed for the emerging security token industry. By establishing a clear regulatory framework for STOs, enterprises can safely and assuredly raise capital in a compliant manner, all while remaining in the US.
What will happen is of course, yet to be seen. The situation’s potential, however, has seemingly unimaginable possibilities.
What do you think of the ruling in the ‘In re Tezos Securities Litigation’ case? What will be the full impact of this case on the security token industry? Let us know what you think in the comments below.
Image courtesy of Pixabay.
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