Tokens

What is Howey Test?

3 prong test to define security

How does ICO work?

Firstly, the developer issues a limited amount of tokens. By keeping a limited amount of tokens they are ensuring that the tokens itself have a value and the ICO has a goal to aim for. The tokens can either have a static pre-determined price or it may increase or decrease depending on how the crowd sale is going. The transaction is a pretty simple one. If someone wants to buy the tokens they send a particular amount of ether to the crowd-sale address. When the contract acknowledges that this transaction is done, they receive their corresponding amount of tokens. Since everything on Ethereum is decentralized, an ICO is considered a success if it is properly well-distributed and a majority of its chunk is not owned by one entity.

There are three tenants to token value

Role Features Purpose

What is STO?

Security Token Offering https://start.shiftmarkets.com/token/?utm_source=google&utm_medium=cpc&utm_term=security%20token&utm_campaign=sat&utm_content=security&gclid=CjwKCAiAnfjyBRBxEiwA-EECLPzyjdnIKKN8rxnJ-7semiZYzs4PRENOUAiLlR5JDAlqTv-PG1GJ7RoCsSgQAvD_BwE#name https://tokenmarket.net/security-token-calendar/ https://cryptonews.com/guides/what-is-a-security-token-offering-sto.htm https://en.wikipedia.org/wiki/Security_token_offering

What is security token?

A crypto token that passes the Howey Test is deemed a security token. These usually derive their value from an external, tradable asset. Because the tokens are deemed a security, they are subject to federal securities and regulations. If the ICO doesn't follow the regulations, then they could be subject to penalties. However, if all the regulations are properly met, then these tokens have immensely powerful use-cases.

Is Bitcoin and Ethereum independent of the platform?

A cryptocurrency coin, like Bitcoin, Bitcoin Cash, Ethereum, etc. are independent of a platform. They can be used as a form of currency outside their native environment. However, on the other hand, OmiseGO, Golem, etc. are examples of tokens which exist on a particular platform, in this case, Ethereum.

What Regulations Are Security Tokens Subjected to?

Anthony Pompliano does an admirable job of explaining the kind of regulations that security tokens will be subjected to in this article. According to him, because Security Tokens are subject to federal security regulations, they are compliant from the first day itself. So, in USA, security tokens need to follow these regulations: Regulation D Regulation A+ Regulation S

What is utility token?

Because most of the ICOs are investment opportunities in the company itself, most tokens qualify as securities. However, if the token doesn't qualify according to the Howey test, then it classifies as utility tokens. These tokens simply provide users with a product and/or service. Think of them like gateway tokens. As Jeremy Epstein, the CEO of Never Stop Marketing, explains, Utility tokens can: Give holders a right to use the network Give holders a right to take advantage of the network by voting Since there is an upper cap on the maximum token availability, the value of the tokens may go up because of the supply-demand equation.

What is ICO?

ICOs are basically crowd sales, the cryptocurrency version of crowdfunding.

Short story of Howey Test

In 1946, the Supreme Court handled a monumental case. The case was SEC vs Howey which would lay down the foundation for the, now infamous Howey Test. The case was about establishing a test of whether a particular arrangement involves an investment contract or not. To keep a long story short, two Florida-based corporate defendants offered real estate contracts for tracts of land with citrus groves. The defendants offered buyers the option of leasing any purchased land back to the defendants, who would then tend to the land, and harvest, pool, and market the citrus. As most of the buyers were not farmers and did not have the agricultural expertise, they were happy to lease the land back to the defendants.

The said transaction will be called an investment contract if it fulfills the following criteria:

It is an investment of money (later expanded to other investments and assets) The investment is in a common enterprise (a horizontal enterprise where the investors pool in their money and assets to invest in a project) There is an expectation of profit from the work of the promoters or the third party.

Regulation D

Regulation D will allow a particular offering to avoid being registered by the SEC provided "Form D" has been filled by the creators after the securities have been sold. The individual who is offering this security may solicit offerings from investors in compliance with Section 506C. So what does Section 506C require? It requires a verification that the investors are indeed accredited and the information which has been providing during the solicitation is "free from false or misleading statements.

Token Roles (5)

Rights By taking possession of a particular token, the holder gets a certain amount of rights within the ecosystem. Value Exchange The tokens create an internal economic system within the confines of the project itself. The tokens can help the buyers and sellers trade value within the ecosystem. This helps people gain rewards upon completion of particular tasks. This creation and maintenance of individual, internal economies are one of the most important tasks of Tokens. Toll It can also act as a toll gateway in order for you to use certain functionalities of a particular system. Eg. in Golem, you need to have GNT (golem tokens) to gain access to the benefits of the Golem supercomputer. Function The token can also enable the holders to enrich the user experience inside the confines of the particular environment. Eg. In Brave (a web browser), holders of BAT (tokens used in Brave) will get the rights to enrich customer experience by using their tokens to add advertisements or other attention based services on the Brave platform. Currency Can be used as a store of value which can be used to conduct transactions both inside and outside the given ecosystem. Earnings Helps in the equitable distribution of profits or other related financial benefits among investors in a particular project. In order to become more valuable, a token must fulfill more than one of these properties. In fact, more properties that a token can have, higher its valuation

Vertical vs Horizontal enterprise

These are two different types of management for controlling and expanding the business. In case of Vertical business, you try to control raw materials, production, and distribution of your products. This way you maximize profits at each successive stage by adding value. Steel and Oil industries are prime examples. In case of horizontal business, diversification is pursued by acquiring unrelated businesses with good growth potential. In some cases competitors can also be purchased to create synergies. For example a pharmaceutical company buying another pharmaceutical company.

Regulation A+

This exemption will allow the creator to offer SEC-approved security to non-accredited investors through a general solicitation for up to $50 million in investment. In order for the requirement to register the security, the issuance of Regulation A+ can take a lot more time compared to other options. For the same reason, Regulation A+ issuance will be more expensive than any other option.

Regulation S

This happens when a security offering is executed in a country apart from the US and is therefore not subjected to the registration requirement under section 5 of the 1993 Act. The creators are still required to follow the security regulations of the country where they are supposed to be executed.

Wide definition

Wide, non-generalised definition: a token is a representation of something in its particular ecosystem. It could value, stake, voting right, or anything. A token is not limited to one particular role; it can fulfil a lot of roles in its native ecosystem.