The Ruling That Sets a Precedent
The decision on how secondary market sales of alternative cryptocurrencies (altcoins) should be classified under the U.S Securities laws has been delivered by Judge Seeborg of the U.S District Court of Northern California. The judgement was made in the case of O’Donnell vs. Kik Interactive, a case in which the plaintiff accused the defendant, Kik Interactive, of selling unregistered securities during their Initial Coin Offering (ICO).
Understanding the Legal Definition of the Investment Agreement
According to the ruling, distinctions must be made between the sale of a token itself and the context in which it is sold. The judge’s analysis applied the U.S Supreme Court’s “Howey Test”, which originated from the case SEC v. W.J. Howey Co. The test states that an investment contract exists when there is an investment of money in a common enterprise, with an expectation of profit from the work of others. Judge Seeborg took into consideration three aspects of the token sale; the manner of sale, the reasonable expectation of profits for the purchaser based on the efforts of Kik Interactive, and Kik Interactive’s significant control over the enterprise.
An Insight into The Judge’s Decision
Seeborg concluded that secondary market sales of altcoins can indeed be classified as investment contracts under certain conditions. The Judge emphasized that although the token holders used their purchased tokens to create value, that activity is separate from the investment contract that may come from the sale of the tokens themselves. As such, the legal status of secondary market sales is determined not by the token itself, but by the circumstances of the sale. This includes the seller’s conduct, and how the profits were expected to derive.
The Takeaway
This is a significant ruling in the world of cryptocurrency. It sets a legal precedent that can affect future cases related to securities and digital tokens. It provides a clearer understanding and a firm guidance on how the secondary market sales of tokens should be treated. The impacts of such classification move beyond mere legalities, it also affects ICOs, the structure of token economies, and even the trading of tokens in virtual markets.
