TRANSCRIPT OF VLOG
- Intro and Summation for Non-deep Divers
Hello, Attorney Jeremy Hogan back with you and welcome to yet another Legal Briefs (crypto-edition). If you are involved in the Crypto or blockchain world in any way, stay with me after the break because today I am going to share with you what the SEC is doing in the USofA – and it’s not only about Ripple. You HAVE to hear this if only because it is extremely terrifying.
I really am only supposed to be doing one crypto vlog a week but once I saw what I’m about to show you, I couldn’t really unsee it and needed to get it off my mind.
If you’re young and impatient what I’m going to tell you about the next 15 minutes or so is that I have found that the SEC has a long-term plan for regulating crypto in the U.S. and it’s not good. It’s actually terrifying. And NO MATTER what crypto you own, you are not safe. Okay kids that’s the summary, go back to playing Halo now.
For the older and wiser in the crowd, stay tuned and I am going to show you exactly why you should be scared, how the SEC is weaving its web, why Ripple being first might be a good thing, and which Cryptos will gain an unfair advantage based on what the SEC is doing so you can begin to think about your portfolios in terms of regulatory danger. It is very very interesting and also very scary.
But first I have to do the disclaimer – do not take anything I say as legal or definitely not financial advice. I don’t know anything about you and I just do these vlogs for fun. If you need a legal opinion – call this guy:
Who can tell me the name of the movie in the comments?
Also, I am not active on other social media or Twitter so please share this or link to it if you can – I feel there should be a kind of SOS to the crypto community about this, but in any case, let’s get going. This vlog is a little more difficult than most of what I do so I am going to share my outline with you as I go through it so you can follow along easier.
- History of SEC Enforcement
In order to truly understand what the SEC is doing you have to understand briefly the regulatory framework the SEC operates in. As you may know, the SEC enforces the 1933 Securities Act and at the same time propagates its own rules which provide its interpretation of certain areas of securities laws. Think of the SEC kind of like a criminal prosecutor who has discretion in who gets arrested and issues opinions letting people know who are likely to get arrested, but still has to apply the law its given.
As you know the SEC regulates sales of securities, ostensibly to protect buyers, and what is legally a security is guided by the Courts and the factors in the Howey case which basically says that a sale of an asset is a sale of a security if the purchaser is relying on the skill and effort of the seller to increase the value of the asset. That’s the nutshell version.
- 2010-2016 No Enforcement
In addressing Initial Coin Offerings in the crypto world which had started way back in 2012 and 2013, the SEC was very very quiet for the first 5 years. There was no enforcement actions and if there were any discussion about crypto, it was behind the scenes. Why that was I am not certain but the crypto world was so new then – I think the SEC wasn’t sure how to address it.
- First Wave of Enforcement (2016-2017)
- The DAO case: This all changed in 2017 when the SEC became more active in crypto regulation – you could say that it was dragged into the DAO fray because in that year there was a scandal involving the DAO Organization which screamed for regulatory involvement when about $50 million of the DAO token was diverted into an attacker’s account. It made headlines and forced the SEC to take action in the form of an enforcement case but there was no litigation – no lawsuit. Because the DAO had taken great cares to build a decentralized network and organized similar to a partnership the case was not a slam-dunk and the SEC let it go when the founders of Ethereum basically decided to repay the victims of the theft (leading to Ethereum and Ethereum Classic)
- The Munchee Case: The next major enforcement action in the first wave here was against the Munchee app. The Munchee company had made an app where people could write reviews of particular dishes at restaurants and get tokens in return. Problem was, at the time of the ICO, there was not even an app in existence! The Munchee company was small, didn’t have a lot of money, and in a weak position, and as soon as it knew the SEC was pursuing enforcement against it, it gave up and entered consent settlement. And the SEC used that weakness to get a ruling that expanded the definition of a security because this case found that the token was a security because the offerors promoted the profit potential of the token EVEN THOUGH the token was technically not a security. Let me repeat that: If the seller of the token even suggests that you can make money from buying the token – that is a security no matter whether it really is or not.
- Second Wave of Enforcement (2018-2019Th)
- Which takes us to 2018 and the 2nd wave of enforcement from the SEC. In 2018 the SEC focused on the Paragon and Airfox coins and now we see the SEC actually filing lawsuits and making argument in Court.
- The Paragon case in particular was important because Paragon had some money to fight with but the facts of the case were weak for Paragon and it eventually settled the lawsuit.
- Looking at the facts in the settlement judgments for Paragon and Airfox what is clear is that the SEC emphasizes 2 legal points: 1. that the proceeds of the sale were used to build the service and also 2. that it was marketed as such. Again, an emphasis on marketing – the SEC expanding the definition.
- Early 2019 saw the SEC take a stab at some small Exchanges in the TokenLot, LLC litigation which rolled over fairly quickly. Notice that the SEC was not taking on the big exchanges like Coinbase or Binance but much smaller weaker companies and the enforcement actions led to successful judgments against these smaller exchanges.
- But the really big action in the second wave was the lawsuit against Kik Interactive which we have discussed on this channel in some detail. This was a big lawsuit for the SEC – KIK had a little money to lawyer-up and indeed it put up a fight all the way through summary judgment where it lost. Here the SEC put a new spin on its argument by saying that KIK DID have a decentralized platform for the token, but the platform was not very functional so it didn’t matter. This judgment highlighted that the SEC can argue the weaknesses in the decentralized platform and added to the SEC’s quiver of arguments. Again, the SEC stretched the definition of security.
- Third Wave (2020-2021) The Lion is Grown
- It’s at this point I think you might be seeing what the SEC had been doing in 2017-2019. Remember, the American legal system is built on precedent. If the precedent is from a same-level or lower court it’s persuasive meaning the Judge should give it some weight. If it’s from a higher Court, the Judge must follow it. What the SEC was doing from 2017-2019 is it was building case precedent and expanding its reach on all prongs of the Howey test. And it was doing this by preying on the weak – the weaker companies, the weaker legal positions and using them to get the case precedent and stretch the boundaries of what is considered a security.
- I used to work for a very large insurance company and I have seen this tactic many times. When an insurance company wants to defend a certain position it has legal team meetings and everyone is told to be on the lookout for Weak cases against weak opponents. You always pursue those cases first before going after the stronger enemies because you want to have good case authority on your side when you eventually end up in front of a Judge and you are taking on a stronger opponent. We’d always want at least 3-4 cases where we won and could throw the judgments in front of the Judges in the more difficult cases. It’s always a good thing to be able to tell the Judge “Your honor, Judge Smith and Judge Cruz have both ruled in our favor before”.
- Think of the SEC in 2017-2019 like a young lion. Does he attack the largest bull? No, he goes for the young and weak – at first. And then when he gets bigger, stronger, and more confident, he goes for the bigger bulls. That is exactly what the SEC was doing – it was preying on the weak and now that it’s been eating for 3 years it was ready for the bull.
- Which takes us up to December 2020 and the lawsuit against Ripple which is the beginning, just the beginning of the Third Wave. The lawsuit against Ripple is a full-grown lion attacking a full-grown bull. Ripple is a rich company that can afford to spend Millions of dollars defending this lawsuit – which is how it hired 20 lawyers to defend it. Ripple didn’t have an ICO last year – it issued tokens more than five years ago and it has numerous decentralized platforms in place so the case is not the slam dunk case the SEC has focused on the last couple years. But this IS the fight that the SEC has been preparing for.
- But what is more concerning than this lawsuit is the anti-crypto position that the SEC is taking and it’s organization in pursuing its litigation efforts. When an insurance company pursues a litigation strategy like this, its goal is to kill whoever or whatever it is going after. I’ve seen it happen and MAKE NO MISTAKE, the history to me makes it clear that the SEC is not the friend of the crypto economy – when you take a look at how its expanded the definition of a security over the last 3-4 years and how it’s bided its time before the Ripple lawsuit – this is a regulatory agency that wants control and dominion over the crypto blockchain world and believes it should.
- Congress helps out: https://www.natlawreview.com/article/congress-extending-sec-statute-limitations-to-10-years . And don’t think that the SEC is all alone in this. When I first read the SEC v. Ripple lawsuit I thought that many of the things referenced in the lawsuit took place 7 and 8 years ago and I looked up the statute of limitation and saw that it was 5 years and thought that could be an issue. Well, literally the next week I was researching that issue when I found out that Congress had snuck into the National Defense Authorization Act an extension of the Statute of Limitations to 10 years. This law change was passed literally 2 weeks after the SEC v. Ripple lawsuit. Coincidence?
- Conclusions and Takeaways
- When I took a close look at how the SEC had been approaching enforcement actions from 2017 up to the Ripple lawsuit I knew right away what was going on – it hit me right away. The SEC was taking its time, expanding it caselaw quiver at the expense of smaller and weaker companies and I have seen this litigation strategy many times in many difference contexts but I was surprised because this strategy is meant to destroy someone or something – not work with them for further clarity. And the SEC has been very successful up to this point – its been textbook so far in this. They now have the case authority positioned so that it doesn’t even necessarily MATTER if a coin offering is a security or not – as long as the company suggests or markets it as a security. That’s crazy to me. I mean, the SEC has locked in 3 out of 4 prongs of the test so that it can make a strong argument that EVERY ICO is the sale of a security! And really, out of all the cases the SEC has looked at, I can find only one, ONE, case where the SEC has determined on its own that a sale was NOT a security and that was the TurnKey Jet token – a smaller token that allowed purchasers to use an already existing aircharter service – but EVERYTHING else is a security according to the SEC.
- So what Can you Take Away from this and What does this mean for your portfolio?
- The main take away from our analysis of the SEC’s actions is that it’s not stopping at the Ripple lawsuit. In the SEC’s eyes, every crypto out there with the exception of MAYBE mined, decentralized, and immediately utilitarian tokens with a completely built out application systems are subject to its regulation. And that’s about 1%. The SEC believes that 99% of cryptocurrencies are subject to its regulation and oversight. The SEC historically brings 2-3 ICO type lawsuits every year and it showed us with the Ripple lawsuit that it’s not scared to take on big players.
- Do you own anything other than maybe Bitcoin? I would be nervous – actually, I AM very nervous myself.
- Look at your portfolio. Do you own any coins where there was an ICO in the last 1-3 years? Do you own any coins where the sellers marketed the idea that the value would go up? Do you own coins where the ledger is not COMPLETELY decentralized or where the use-cases for the token are not completed yet? The SEC could be going after your holding next.
- So, as an investor what that does this mean? Well for holders of XRP – they have actually already seen what happens – an immediate loss in value. But there might be a silver-lining for XRP because by being being drug into the tunnel first it will also emerge first. The SEC has only one shot at these lawsuits so if Ripple can make it out of the tunnel, then it’s in the clear.
- In analyzing the dangers to my crypto holdings, I would be concerned about first and foremost about my smaller coin companies. A smaller coin, even if it can and should win a lawsuit, might not be able to afford millions of dollars to fight, and it’s extremely distracting for a small company to be involved in dangerous and protracted litigation. Watch out for the smaller weaker companies.
- I would next be worried about coin offerings that happened more recently. My instinct is that the SEC is going to turn its focus to more recent offerings with the thought process that the newer companies “should have known better.” Just an instinct.
- And then of course I would look at whether the company had a decentralized and FULLY built out platform for the coin BEFORE the offering. IF not, the company is in danger.
- There are too many coins to analyze any single one but those are the 3 things I’d look for. My instinct is that Ripple is a big bite for the SEC so it will turn its attention to a smaller target before looking at another big one.
In conclusion, it is obvious that the SEC’s position is that almost ALL ICOs should be registered offerings of securities and it is willing and getting more and more able to go after the crypto-world. Take a look at what your money is in because the BIGGEST danger to your cypto-currency, in my opinion, is the SEC and if you think your favorite coin holding is safe because Ripple took the hit for you – I’m afraid that history shows you are sorely mistaken. And unless something changes at a higher administrative level, the SEC will be coming for your crypto as well.