US REGULATION

OF DIGITAL ASSETS
March 16th, 2021
US Regulation of Digital Assets
Seoul, Korea
March 2021

Presented by:
Louis Lehot
llehot@foley.com

Patrick Daugherty
pdaugherty@foley.com
@daughertylawyer
 Our Topics Today

 Money and Digital Assets

 Panoply of United States Regulations
 Securities Law Fundamentals
 A Closer Look at Digital Assets
 Points to Ponder
Money
1934 Gold Certificate
 SEC and FINRA Definitions
 Note 1 to FINRA Regulatory Notice 18-20 (July 6, 2018) states in full: For
purposes of this Notice, the term ‘digital asset’” refers to cryptocurrencies and
other virtual coins and tokens (including virtual coins and tokens offered in an
initial coin offering (ICO) or pre-ICO), and any other asset that consists of, or is
represented by, records in a blockchain or distributed ledger (including any
securities, commodities, software, contracts, accounts, rights, intangible
property, personal property, real estate or other assets that are ‘tokenized,’
‘virtualized’ or otherwise represented by records in a blockchain or distributed
ledger).”
 Note [1] to the Joint Staff Statement on Broker-Dealer Custody of Digital Asset
Securities (July 8, 2019) states in full: “For the purposes of this statement, the
term ‘digital asset’ refers to an asset that is issued and transferred using
distributed ledger or blockchain technology, including, but not limited to, so-
called ‘virtual currencies,’ ‘coins,’ and ‘tokens.’ A digital asset may or may not
meet the definition of a ‘security’ under the federal securities laws. For the
purposes of this statement, a digital asset that is a security is referred to as a
‘digital asset security.’”
 Universe of Crypto Assets a/k/a Digital Assets:
Coins and Tokens
 Coins purport to have general use (but aren’t used much yet)
– like the USD, GBP, Euro

– BTC, ETH, LTC, XRP, others

– Volatility

 Tokens supposedly have specific use (and are used as intended)

– like subway tokens or movie tickets

– sometimes called “utility tokens”

– 2,000+ offered to date

– Only 3 have been OK’d by SEC No-Action Letters

 “Stable Coins” are a proxy for the USD

– Tether (USDT), Gemini (GUSD), others

– bridge from crypto to fiat and back

 How Crypto Assets are Regulated in and by the USA

 As commodities or derivatives – CFTC

 As property – IRS taxes every transaction as
capital gain or loss
 As money – Treasury FinCEN and state money
transmission laws
 As securities – SEC
The last item is the one we are focusing on today.
For a close look at these topics (among others), see “Digital and Digitized Assets: Federal
and State Jurisdictional Issues,” by ABA Derivatives and Futures Law Committee, Innovative
Digital Products and Processes Subcommittee Jurisdiction Working Group (March 2019),
https://www.americanbar.org/content/dam/aba/administrative/business_law/buslaw/
committees/CL620000pub/digital_assets.pdf
 Other Important Laws

 The New York “BitLicense” Law

 State Securities Laws

 State Crypto Asset Laws

 OCC Fintech Charter and Crypto Asset Custody Services

 Federal and State Banking Laws in General

 Patent and trademark law

 Consumer protection laws

 Non-US laws, rules and regulations

 Emerging importance of Wyoming

 But the SEC Won’t Defer to Wyoming
 An October 23, 2020, Wyoming Division of Banking
letter addresses questions regarding custody of
digital assets under federal law and state law by
stating that a Wyoming-chartered public trust
company may provide custodial services for digital
assets under Wyoming law.
 SEC Staff Statement (Nov. 9, 2020): “The Staff …
encourage[s] interested parties to engage with the
Staff directly on the application of the Custody Rule
to digital assets, including with respect to the
definition of ‘qualified custodian’ under the rule.”
 Treasury FinCEN Regulation

Two elements:
• “Money service business” registration
• Bank Secrecy Act / Anti-Money Laundering compliance program
 Securities Law Fundamentals
 The federal securities laws are: The Securities Act of 1933;
the Securities Exchange Act of 1934; the Trust Indenture Act
of 1939; the Investment Company Act of 1940; the
Investment Advisers Act of 1940; the Sarbanes-Oxley Act of
2002; the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010
 “Security” Definition
 Securities Act Registration
 Securities Fraud
 Securities Manipulation
 “Security” Defined
 Section 2(a)(1) of the Securities Act of 1933: “The term ‘security’ means any
note, stock, treasury stock, security future, security-based swap, bond,
debenture, evidence of indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil, gas, or
other mineral rights, any put, call, straddle, option, or privilege on any security,
certificate of deposit, or group or index of securities (including any interest
therein or based on the value thereof), or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to foreign
currency, or, in general, any interest or instrument commonly known as a
‘security’, or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing.”
 The other federal securities laws define the term “security” in nearly-identical
prose.
 Securities Act Registration Explained
 Section 5(c) of the Securities Act of 1933: “It shall be unlawful for any person, directly or
indirectly, to make use of any means or instruments of transportation or communication in
interstate commerce or of the mails to offer to sell or offer to buy through the use or
medium of any prospectus or otherwise any security, unless a registration statement has
been filed as to such security, or while the registration statement is the subject of a refusal
order or stop order….”
 Section 12(a) of the Securities Act of 1933: “Any person who … (1) offers or sells a
security in violation of [Section 5] … shall be liable … to the person purchasing such
security from him at law or in equity in any court of competent jurisdiction, to recover the
consideration paid for such security with interest thereon, less the amount of any income
received thereon, upon the tender of such security, or for damages if he no longer owns
the security.”
 Section 13 of the Securities Act of 1933: “No action shall be maintained to enforce any
liability …, if the action is to enforce a liability created under section [12(a)(1)], unless
brought within one year after the violation upon which it is based.
 Summarizing Sections 5, 12(a)(1) and 13, investors have a one-year “put” right as to any
securities. sold to them without SEC registration, that were required to be registered.
 Securities Fraud Prohibited
SEC Rule 10b-5: It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate commerce, or of
the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
 Securities Manipulation Prohibited
 Section 9(a) of the Securities Exchange Act of 1934: It shall be unlawful
for any person, directly or indirectly, by the use of the mails or any
means or instrumentality of interstate commerce, or of any facility of any
national securities exchange, or for any member of a national securities
exchange … [t]o effect, alone or with 1 or more other persons, a series
of transactions in any security registered on a national securities
exchange, any security not so registered, or in connection with any
security-based swap or security-based swap agreement with respect to
such security creating actual or apparent active trading in such security,
or raising or depressing the price of such security, for the purpose of
inducing the purchase or sale of such security by others.
 Notice the scienter requirement in the last clause of the prohibition.
 Securities Law Analysis of Digital Assets
Howey
The DAO Report
“When Howey Met Gary (Plastic)”
The SEC FinHub Framework
“How We Howey”
No-Action Letters
Telegram, Kik, Ripple
Points to Ponder
 Howey and “the Howey Test”
 SEC v. Howey Co., 328 U.S. 293 (1946)
 An offering of units of a citrus grove development, coupled with a
contract for cultivating, marketing, and remitting the net proceeds to the
investor, was an offering of an "investment contract" and thus a
“security” under the Securities Act of 1933, and thus subject to the
registration requirements of the Act.
 As glossed by subsequent cases, Howey held that an investment
contract is:
– (1) an investment of money [or other value]
– (2) in a [horizontal or vertical] common enterprise,
– (3) [primarily] with an expectation of profit [rather than consumption]
– (4) solely [or primarily] from the [managerial or entrepreneurial]
efforts of others.
 The DAO Report
 Release No. 34-81207, Report of Investigation Pursuant to Section
21(a) of the Securities Exchange Act of 1934: The DAO (July 25, 2017)
 The DAO was a Decentralized Autonomous Organization, a “virtual”
organization embodied in computer code and executed on a distributed
ledger or blockchain. Holders of DAO Tokens stood to share in the
anticipated earnings from projects as a return on their investment.
 Also, DAO Token holders could monetize their investments by re-selling
DAO Tokens on platforms that supported secondary trading.
 Applying Howey, the SEC determined that the DAO Token was an
investment contract and thus a security: Token holders invested ETH in
a common enterprise with a reasonable expectation of profits derived
from the managerial efforts of the founders and promoters
 1933 Act applies: Issuers must register offers and sales of securities
unless a valid exemption applies
 The DAO Report (cont’d)
 1934 Act applies: The platforms matched orders from multiple parties to
buy and sell DAO Tokens for execution based on non-discretionary
methods.
– A platform that meets the definition of an “exchange” must either
register as a national securities exchange or operate pursuant to an
exemption from such registration
– A platform might qualify for exemption as an alternative trading
system (or ATS), but these platforms didn’t even try
 1940 Acts apply:
– Investment Advisers Act of 1940: A person associated with The DAO might have been
an “investment adviser” under Section 202(a)(11) of this Act
– Investment Company Act of 1940: SEC also warned about the possible applicability of
this Act
 The DAO Report (cont’d)
 Reading the DAO Report, it is evident that whenever a “security” is
transacted, all of the federal securities laws are potentially involved.
 No enforcement action was taken other than the issuance of the report.
The SEC uses Section 21(a) reports to call the attention of the industry
and the bar to problem areas needing reform. They are an exercise of
soft power.
 Did the crypto industry get the message and reform its ways? What
about “crypto lawyers”?
 Sadly, mostly, “no.”
 The result has been enforcement action under every statute
administered by the SEC -- and the sanctions are escalating.
 SEC Enforcement
 SEC has warned and sued digital asset players for:
– Fraud

– Failure to register securities

– Failure to register as a broker-dealer

– Failure to register as an investment company

– Failure to register as an exchange

 Missing to date – civil or administrative proceedings against “crypto lawyers”

 Expect more cases -- the usual gestation of an enforcement case is a year
 Expect sanctions to escalate: from censure and disgorgement to big civil
money penalties, permanent industry bars, injunctions, structured relief,
criminal prosecution
 Bill Hinman’s Speech on June 14, 2018
Digital Asset Transactions: When Howey Met Gary (Plastic)
(https://www.sec.gov/news/speech/speech-hinman-061418”
 Bitcoin is not a security

 Ether is not a security (any longer)

 Digital asset offerings are almost always securities offerings under Howey in the
early days of an enterprise.
 But they can become non-securities offerings in one of two ways:
– Primary expectation is not profit but consumption

– Reliance on efforts of others is attenuated because the enterprise is

decentralized: “If the network on which the token or coin is to function is
sufficiently decentralized – where purchasers would no longer reasonably
expect a person or group to carry out essential managerial or entrepreneurial
efforts – the assets may not represent an investment contract.”
– The context matters. The oranges in Howey had utility.
 The FinHub Framework
 SEC Division of Corporation Finance, “Framework for ‘Investment Contract’
Analysis of Digital Assets” (April 3, 2019),
https://www.sec.gov/news/public-statement/statement-framework-investment-co
ntract-analysis-digital-assets
 Not the asset but the circumstances. “The focus of the Howey analysis is not
only on the form and terms of the instrument itself … but also on the
circumstances surrounding the digital asset and the manner in which it is
offered, sold, or resold (which includes secondary market sales). Therefore,
issuers and other persons and entities engaged in the marketing, offer, sale,
resale, or distribution of any digital asset will need to analyze the relevant
transactions to determine if the federal securities laws apply.”
 Information asymmetry is key. “Among the information that must be disclosed
is information relating to the essential managerial efforts that affect the success
of the enterprise…. [S] ignificant informational asymmetries may exist between
the management and promoters of the enterprise on the one hand, and
investors and prospective investors on the other hand. The reduction of these
information asymmetries through required disclosures protects investors and is
one of the primary purposes of the federal securities laws.”
 The FinHub Framework (cont’d)
“Investment of money” in a “common enterprise” is easily found for digital
assets. “Bounty programs” and “air drops” can be investments of money, and a
“common enterprise” has been found where “the fortunes of digital asset
purchasers have been linked to each other or to the success of the promoter's
efforts.”
“Reliance on the efforts of others”: “When a promoter, sponsor, or other third
party (or affiliated group of third parties) (each, an ‘Active Participant’ or ‘AP’)
provides essential managerial efforts that affect the success of the enterprise, and
investors reasonably expect to derive profit from those efforts, then this prong of
the test is met.” Factors pointing toward reliance on the efforts of others include:
 An AP is responsible for the development, improvement, enhancement,
operation, or promotion of the network, particularly if purchasers of the asset
expect an AP to be performing or overseeing tasks necessary for the network or
asset to achieve or retain its intended purpose or functionality.
 There are essential tasks or responsibilities performed and expected to be
performed by an AP, rather than an unaffiliated, dispersed community of network
users (a "decentralized" network).
 The FinHub Framework (cont’d)
Other factors pointing toward “reliance on the efforts of others” include:
 An AP creates or supports a market for, or the price of, the asset. This can
include, for example, an AP that: (1) controls the creation and issuance of the
asset; or (2) takes other actions to support a market price of the asset, such as
by limiting supply or ensuring scarcity.
 An AP has a lead or central role in the direction of the ongoing development of
the network or the asset. In particular, an AP plays a lead or central role in
deciding governance issues, code updates or how third parties participate in the
validation of transactions that occur with respect to the asset.
 An AP has a continuing managerial role in making decisions about or exercising
judgment concerning the network or the characteristics or rights that the asset
represents. (The Framework lists six considerations here.)
 Purchasers would reasonably expect the AP to undertake efforts to promote its
own interests and enhance the value of the network or asset. (The Framework
lists four considerations here.)
 The FinHub Framework (cont’d)
Reasonable Expectation of Profits: “Profits can be, among other things, capital
appreciation resulting from the development of the initial investment or business
enterprise or a participation in earnings resulting from the use of purchasers' funds.
Price appreciation resulting solely from external market forces (such as general
inflationary trends or the economy) impacting the supply and demand for an
underlying asset generally is not considered "profit" under the Howey test.” Factors
pointing toward reasonable expectation of profits include:
 The asset gives the holder rights to share in the enterprise's income or profits or
to realize gain from capital appreciation. (The Framework lists three
considerations here.)
 The asset is transferable or traded on or through a secondary market or
platform, or is expected to be in the future.
 Purchasers reasonably would expect that an AP's efforts will result in capital
appreciation.
 The asset is offered broadly to potential purchasers as compared to being
targeted to expected users of the goods or services or those who have a need
for the functionality of the network.
 The FinHub Framework (cont’d)
 The asset is offered in quantities indicative of investment intent instead of
quantities indicative of a user of the network. For example, it is offered and
purchased in quantities significantly greater than any likely user would
reasonably need.
 There is little apparent correlation between the purchase/offering price of the
asset and the market price of the particular goods or services that can be
acquired in exchange for the digital asset.
 There is little apparent correlation between quantities the asset typically trades
in and the amount of the underlying goods or services a typical consumer would
purchase for use or consumption.
 The AP has raised an amount of funds in excess of what may be needed to
establish a functional network or digital asset.
 The AP is able to benefit from its efforts as a result of holding the same class of
assets as those being distributed to the public.
 The AP continues to expend funds from proceeds or operations to enhance the
functionality or value of the network or digital asset.
 The FinHub Framework (cont’d)
 A reasonable expectation of profits also might be present if the asset is
marketed emphasizing any of the following:
– The expertise of an AP or its ability to build the value of the network or asset.

– Marketing terms that indicate the asset is an investment or that the solicited
holders are investors.
– Use of proceeds from sale of the asset is to develop the network or asset.

– The future (and not present) functionality of the network or asset, and the
prospect that an AP will deliver that functionality.
– The promise (implied or explicit) to build a business or operation as opposed
to delivering currently available goods or services for use on existing network.
– Ready transferability of the asset as a key selling feature.

– Potential profitability of operations of the network or potential appreciation in

value of the asset.
– A market for trading the asset, particularly where the AP implicitly or explicitly
promises to create or support that market.
 The FinHub Framework (cont’d)
A digital asset previously sold as a security might later be re-evaluated and
re-characterized as a commodity. (Probably this is why Bitcoin and Ether aren’t
securities.) In re-evaluating an asset previously sold as a security, there are further
considerations relative to the "reasonable expectation of profits" such as:
 Purchasers no longer reasonably expect that continued development efforts of
an AP will be a key factor for determining value of the asset.
 The value of the asset has shown a direct and stable correlation to the value of
the good or service for which it may be exchanged or redeemed.
 The trading volume for the asset corresponds to the level of demand for the
good or service for which it may be exchanged or redeemed.
 Whether holders are then able to use the asset for its intended functionality,
such as to acquire goods and services on or through the network or platform.
 Whether any economic benefit that may be derived from appreciation in the
value of the digital asset is incidental to obtaining the right to use it.
 No AP has access to material, non-public information.
 The FinHub Framework (cont’d)
Other relevant considerations:
– The distributed ledger network and asset are fully developed and operational.

– Holders are immediately able to use the asset for its intended functionality on
the network, particularly where there are built-in incentives to encourage such
use.
– The assets' creation and structure is designed and implemented to meet the
needs of users, rather than to feed speculation as to its value or development
of the network. Example -- the asset can only be used on the network and
generally can be held or transferred only in amounts that correspond to a
purchaser's expected use.
– Prospects for appreciation in the value of the digital asset are
limited. Example -- the design of the asset provides that its value will remain
constant or even degrade over time, so a reasonable purchaser would not be
expected to hold the digital asset for extended periods as an investment.
 The FinHub Framework (cont’d)
Other relevant considerations (cont’d):
– If referred to as a virtual currency, the asset can immediately be used to make
payments in a wide variety of contexts, such that one may pay for goods or
services with the asset without first converting it to another digital asset or fiat
currency. If characterized as a virtual currency, the asset operates as a store
of value that can be saved, retrieved and exchanged for something of value.
– With respect to an asset that represents rights to a good or service, it
currently can be redeemed within a developed network to acquire or
otherwise use those goods or services. Relevant factors may include:
 a correlation between the purchase price of the asset and a market price of
the particular good or service for which it may be redeemed or exchanged.
 Availability of the asset in increments that correlate with a consumptive
intent versus an investment or speculative purpose.
 Intent to consume the Asset may also be more evident if the good or
service underlying the asset can more efficiently be acquired through use
of the asset on the network.
 The FinHub Framework (cont’d)
Other relevant considerations (cont’d):
– Any economic benefit that may be derived from appreciation in the value of
the digital asset is incidental to obtaining the right to use it for its intended
functionality.
– The digital asset is marketed in a manner that emphasizes the functionality of
the digital asset, and not the potential for the increase in market value of the
digital asset.
– Potential purchasers have the ability to use the network and use (or have
used) the digital asset for its intended functionality.
– Restrictions on the transferability of the digital asset are consistent with the
asset's use and not facilitating a speculative market.
– If the AP facilitates the creation of a secondary market, transfers of the digital
asset may only be made by and among users of the platform.
 SEC Commissioner Hester M. Peirce
“How We Howey”
Securities Enforcement Forum, East Palo Alto
(May 9, 2019)
“While Howey has four factors to consider, the framework lists 38 separate
considerations, many of which include several sub-points. A seasoned
securities lawyer might be able to infer which of these considerations will likely be
controlling and might therefore be able to provide the appropriate weight to each.
Whether the framework gives anything new to the seasoned securities lawyer used
to operating in the facts and circumstances world of Howey is an open question. I
worry that non-lawyers and lawyers not steeped in securities law and its attendant
lore will not know what to make of the guidance. Pages worth of factors, many of
which seemingly apply to all decentralized networks, might contribute to the
feeling that navigating the securities laws in this area is perilous business.”
 TurnKey Jet, Inc. (April 3, 2019)
https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1.htm
No-action letter issued by SEC DCF to prospective issuer of digital assets in the form of
tokenized “jet cards” evidenced by smart contracts and deployed on a private, permissioned
blockchain.
In reaching this position, the Staff particularly noted that:
-- The issuer will not use any funds from token sales to develop the platform, network, or app,
each of which will be operational at the time any tokens are sold.
-- The tokens will be immediately usable for their intended functionality (purchasing air charter
services) at the time they are sold.
-- The issuer will restrict transfers of tokens to platform participant wallets only, and not to
wallets external to the platform.
-- The issuer will sell tokens at a price of one USD per token throughout the life of the
program, and each token will represent an issuer obligation to supply air charter services at a
value of one USD per token.
-- If the issuer offers to repurchase tokens, it will only do so at a discount to the face value of
the tokens (one USD per token) that the holder seeks to resell to the issuer, unless a US
court orders the issuer to liquidate the tokens.
-- The token is marketed in a manner that emphasizes the functionality of the token, not the
potential for increase in market value of the token.
 Commissioner Peirce, “How We Howey”
Critique of TurnKey Jet
 The company intended to effectively tokenize gift cards. Customer members
could purchase tokens that would be redeemable for charter jet services. “The
tokens could be sold only to other members. This transaction is so clearly not an
offer of securities that I worry the staff’s issuance of a digital token no-action
letter—the first and so far only such letter—may in fact have the effect of
broadening the perceived reach of our securities laws.”
 “And yet, the staff’s letter did not stop at merely stating that the token offering
would not qualify as a securities offering, but highlighted specific but non-
dispositive factors. In other words, the letter effectively imposed conditions on a
non-security. For example, the staff’s response prohibits the company from
repurchasing the tokens unless it does so at a discount. Further, as I mentioned
earlier, the incoming letter precluded a secondary market that includes non-
members. Does that mean that a company that chooses to offer to repurchase
gift cards at a premium or that allows gift card purchasers to sell or give them to
third parties needs to call its securities lawyer to start the registration process?”
 There was nothing “gray” about the TurnKey Jet business plan, “but
issuing this letter may give the false impression that there was.”
 Pocketful of Quarters (July 25, 2019)
https://www.sec.gov/corpfin/pocketful-quarters-inc-072519-2a1
POQ created a universal online gaming token, called “Quarters.” The SEC Staff agreed that
PoQ’s “Quarters” will not be “securities” if, among other things:
 PoQ will not use any funds from Quarters sales to build the Quarters Platform, which has
been fully developed and will be fully functional and operational immediately upon launch
and before any Quarters are sold; Quarters will be immediately usable for their intended
purpose (gaming) when sold;
 PoQ will implement technology and contract provisions governing Quarters and the
Quarters Platform to restrict transfer of Quarters to PoQ or to wallets on the Quarters
Platform;
 Quarters will be continuously available to gamers in unlimited quantities at a fixed price;
 there will be a correlation between the purchase price of Quarters and the market price of
accessing and interacting with Participating Games; and
 PoQ will market and sell Quarters to gamers solely for consumptive use as a means of
accessing and interacting with Participating Games.
 IMVU, Inc. (Nov. 19, 2020)
https://www.sec.gov/corpfin/imvu-111920-2a1
IMVU is an online three-dimensional avatar-based social community. IMVU will offer and sell
VCOIN, which will be transferable both on and off IMVU’s platform. The SEC Staff agreed that
IMVU’s VCOIN will not be “securities” if, among other things:
 IMVU will not use proceeds from the sale of VCOIN to finance its Upgrade, which has
been fully developed and will be fully functional and operational immediately upon its
launch and before any VCOIN is sold;
 VCOIN will be immediately usable for its intended purpose at the time it is sold;
 IMVU will impose specified limits on VCOIN purchases, conversions, and transfers;
 VCOIN will be made continuously available in unlimited quantities and at a fixed price, and
IMVU will always generate enough supply of VCOIN to maintain VCOIN’s fixed price;
 IMVU will not promote or support listing or trading of VCOIN on any third-party trading
platform;
 IMVU will market and sell VCOIN to Users solely for consumptive use as a means of
exchanging value on, and in connection with, the Platform; and
 SEC v. Telegram Group Inc. and TON
Issuer Inc., 19 Civ. 9439 (SDNY)
 March 2020 ruling: Telegram raised $1.7 billion by selling interests in Grams, conceded to
be a “security” because this happened before the TON blockchain launched, in a putative
Rule 506 transaction (a private placement). Later, after building the TON blockchain, TON
would sell newly-created Grams publicly. Upon launch, the Grams would have “functional
consumptive uses,” hence would be a “commodity” (and not a “security”) in defendants’
view.
 But the court found as a fact that the two planned transactions were part of a single
scheme and that the series of understandings, transactions and undertakings was a
“security” under the Howey test. In other words, the court integrated the two transactions,
which destroyed the private placement exemption for the first one. The scheme was a
“disguised public distribution,” where vertical and horizontal commonality were both
present. This ruling blocked the planned second transaction.
 May 13, 2020 – Telegram shut down.
 Telegram agreed to pay an $18.5 million civil penalty to settle with the SEC and to give the
SEC 45 days’ advance notice of any future issuance of digital assets. It also agreed to pay
$1.2 billion in disgorgement, offset by amounts already returned or planned to be returned
to initial purchasers of Grams.
 SEC v. Kik Interactive, 19 Civ. 5244
(SDNY)
 This suit arose from a $100 million fall 2017 ICO. Again, there was a putatively private
“pre-sale”, followed one day after the pre-sale ended by a public “token distribution event”
– the ICO. The SAFT used in the pre-sale was conceded to be a security.
 “The Pre-Sale Was Part of an Integrated Offering.” The court granted the SEC’s motion
for summary judgment on September 30, 2020, finding that undisputed facts established
that Kik’s sales of “Kin” tokens were sales of investment contracts, and therefore of
securities, and that Kik violated the federal securities laws when it conducted an
unregistered offering of securities that did not qualify for any exemption from registration
requirements. The court further found that Kik’s private and public token sales were a
single integrated offering.
 The final judgment permanently enjoined Kik from violating the registration provisions of
Sections 5 of the Securities Act. Kik was also required, for the next three years, to notify
the SEC before engaging in enumerated future issuances, offers, sales, and transfers of
digital assets. And there was a $5 million penalty.
https://www.sec.gov/news/press-release/2020-262.
 Ripple Litigation
 Vladi Zakinov v. Ripple Labs, Inc., Bradley Garlinghouse, et
al. (N.D. Cal. Feb. 26, 2020) (Case No. 18-cv-06753-PJH)
– Putative class action arising out of the creation, dispersal, circulation
and sale of XRP
– “Since the XRP’s creation, defendant Ripple has placed a substantial
percentage of XRP that it owns in escrow and developed a plan for
when and in what quantities XRP should be sold.”
– Garlinghouse “characterized the XRP distribution as ‘ongoing.’”
– “Ripple’s website provides advice on ‘How to Buy XRP’ and includes
hyperlinks to exchanges trading XRP.”
– Securities Act Section 5 claim (registration) and Section 15 claim
(control person liability) sustained against motion to dismiss
 Update: The SEC has brought suit
 Points to Ponder
 Calling it a “utility token” doesn’t mean it’s not a security. If it’s sold like
an investment, it probably is an investment.
 There are four federal statutes and 51 state laws that apply to securities
offering, trading and investing. There also are applicable legal regimes
governing commodities and derivatives, money and property.
 Aside from the SEC, the DOJ and the states, there is an active plaintiffs’
and class action bar chasing targets in their wake (and otherwise).
 Organizing the business outside the United States does not mean the
U.S. securities laws won’t apply: “As the Commission discussed in the DAO
Report, … digital assets issued on a blockchain may be offerings of securities …
and, if they are, issuers and others who offer or sell these securities in the
United States must register the offering with the Commission or qualify for an
exemption from registration.” Paragon case, paragraph 39 (emphasis added).
 Many lawyers who’ve practiced in the securities field forever find digital
assets too challenging to undertake alone. Don’t try this at home, alone.
Speaker Biography
Louis Lehot
Partner, Silicon Valley
llehot@foley.com
 Public Markets
 M&A
 Finance
Louis Lehot’s blend of Wall Street and Silicon
Valley experience informs his ability to offer
strategic counseling that is eminently practical,
valuable and custom-tailored to each client’s
specific circumstances.
He has 20+ years of on-the-ground experience in
Silicon Valley, London, Paris (completely fluent in
French) and New York, uniquely positioning him to
orchestrate both domestic and cross-border
transactions. Louis is a consummate negotiator
with a deep network of relationships — he is gifted
at achieving clients’ optimal sales price targets. He
regularly acts as company-side counsel in
mergers, acquisitions, dispositions, spin-offs,
strategic investments and joint ventures.
Louis is based in Silicon Valley. His clients include
technology, life sciences, clean energy and
innovation entrepreneurs and their investors in
their pursuit of risk-adjusted return liquidity events.
Louis works with a multidisciplinary team
comprising other Foley attorneys and business
advisors in the key legal disciplines required to
structure and execute mergers, acquisitions, and
transactions involving sales to strategic and
financial buyers. Louis also leverages technology
to increase accuracy, efficiency, and excellence.
Louis enjoys helping businesses and ventures with
compelling technologies reach their growth
objectives with sound legal strategies and
solutions
Speaker Biography
Patrick Daugherty
Partner, Chicago
pdaugherty@foley.com
 Public Markets
 M&A
 Finance
Patrick Daugherty directs a corporate, M&A,
finance, financial regulatory, and fintech practice
devoted to capital formation, innovation, and
return of and on investment. He leads teams of
lawyers that provide the particular array of
services needed by each client day-to-day and
has helped clients monetize billions of dollars in
sweat equity. He also leads the firm’s blockchain
task force. As a confidential adviser, Patrick helps
clients resolve sensitive legal matters out of court,
quickly and quietly.
Patrick manages relationships with clients in
diverse industries such as health care, financial
services, fintech and manufacturing, creating and
managing teams of lawyers to service each client.
Patrick directs multi-disciplinary legal teams
planning and executing tender offers, exchange
offers, restructurings, recapitalizations, mergers,
stock purchases, asset purchases, divestitures,
LBOs, MBOs, and "going private" transactions. He
also plans and executes public and private offerings
of equity, debt and hybrid securities occupying
every rung of a company’s capital structure,
throughout its entire life cycle: from “angel” or
“seed” investment and “Series A” preferred stock to
the IPO, PIPE and secondary offerings, as well as
mezzanine, convertible, exchangeable, and high-
yield and high-grade debt issues. With his
colleagues, Patrick organizes hedge funds,
commodity trading funds, and private equity funds.
Reminders:
This outline is merely that – an outline of topics and
issues. It does not address all the important issues and
is not relevant to all situations. This outline is not legal
advice or financial advice. Please consult qualified
professionals.