Audio Of The Week: How About Howey?

This Unchained Podcast with Patrick Gibbs of the law firm Cooley and Ted Livingston founder of the Kin cryptocurrency project is a great discussion of the Howey Test that the SEC has put forward as the framework through which to evaluate whether a crypto token is a security.

Here are links to some interesting parts of the discussion:

1/ Ted Livingston explains who Howey was and the details of that case.

2/ Patrick explains why Kin (and most crypto tokens as well) is not a security.

This is the kind of stuff that mostly interests law nerds, but it is very relevant to all developers who are building crypto tokens and putting them out into the market. So it is worth getting knowledgeable about this stuff.

And if you want to support this Kin case as it works its way through the court system and ends up creating a new precedent that could supersede Howey, you can do that here.


Comments (Archived):

  1. jason wright

    Start with first principles. Why did Kik create Kin?

  2. awaldstein

    Very solid interview.I listened to many talks during Blockchain Week on this topic, this interview trumped most all of them on takeaways as it asked the questions more specifically and pressed the answers to clarify the edges.Honestly if you work with, in or invest in crypto in any way you need to wrap your head around this.

  3. Richard

    Or you could simply – in 5 minutes – read the following :…The probability of winning on the merits are between slim and none, and slim is out today.

  4. Vitomir Jevremovic

    Maybe there should be a detailed framework proposal developed by the community (or interested stakeholder groups), and then fight over a document with clear recommendations that are thought out (but also include SEC point of view). Saying all the time “SEC is wrong, they do not understand the new era” is not helping. Truth is, no one knows what is right in crypto space right now, but at least spend some time and help institutions understand by making the first move that is focused. (which I hope Kin is actually doing)

  5. JLM

    .I don’t think I consciously realized that Kik had received a Wells Notice (16 Nov 2018) since it was so long ago. I knew it once upon a time, but it was not in the front part of my brain.A Wells Notice is a huuuuuuuuuuge deal. It is the statement by the SEC that they are recommending the initiation of enforcement actions against a target. Wells Notice is like warming up the engines on the Enola Gay.A Wells Notice triggers the right of a target to make a responsive Wells Submission (Kik responded 7 Dec 2018 — unlucky date, Pearl Harbor anniversary).Lots of lawyers will decline the Wells Submission opportunity unless the SEC has made a big misstatement of fact or has bungled the pertinent law. They would just as soon not tip the hand of their argument and they don’t like to be boxed into a specific body of logic for the rest of the case.When you make a Wells Submission, you can say whatever you want the SEC to know before they initiate an enforcement action. Very, very, very few Wells Submissions change the mind of the SEC staff. [Remember they have been meeting for almost two years, so what’s new that they haven’t heard before?]Here’s the pertinent Wells Notice and Wells Submission for Kik:file:///C:/Users/Jeff/Downloads/wells_response.pdfAs such documents go, it is a complete and comprehensive discussion of the case. Contrary to what the lawyer suggests on the tape, it is a pretty damn clear recitation of what the SEC thinks Kik did wrong.The whole case gets down to a simple difference:1. The SEC says Kin is a security.2. Kik says Kin is a currency — the p 11 of the 1934 Securities Exchange Act exception that says securities “…shall not include currency.”It would take a lot longer for a lawyer being paid $750/hr to explain it, but that’s the nut to be cut.The Howey case is a SCOTUS case. Hello, America — the SEC can’t ignore a SCOTUS case, the SEC can’t re-write policy, a couple of lawyers can’t agree that it isn’t pertinent.. Not how it works. Even if Kin is the greatest thing since sliced bagels.You can decide you think Howey is too old, dopey, wrongly decided — take your pick, but you can’t get it changed except by going back to the SCOTUS and having it changed with another case that changes it.Problem with that is there is something called stare decisis — which says that cases must be determined IAW precedent. Where does precedent come from? You guessed it — SCOTUS cases.This is why everybody asks SCOTUS nominees — “Do you think that Roe v Wade is ‘settled law’?” Settled law is precedent. Precedent drives stare decisis.It is hard as Hell to overturn a well decided SCOTUS case. That’s just the way it works. Howey may be about oranges and orange groves, but it is settled law.So, the idea that Kik is going to “reason” Howey into the dustbin of history is a little specious. The idea you are going to legislate it into the same dustbin is equally specious.Let’s agree that legislative relief is going to be years down the road if ever. It is extraordinary to legislate away a SCOTUS case.Which leaves us with the whole Defend Crypto effort. Kik has incurred more than $5MM in legal fees wrangling with the SEC. Wow!All Defend Crypto is trying to do is to get help with the next $5MM of their legal fees in a sort of Mark Twain country wit approach.Kik says it will “offer itself up” as a test case — nod, genuflect, make the Sign of the Cross — but the truth of the matter is that the SEC has them by the short hairs. They couldn’t escape this with a Fairbairn-Sykes commando knife.There isn’t going to be any “volunteering”, there isn’t anything about this case that is going away, this is a cage match between the SEC and Kik.Don’t get me wrong — clever gambit for Kik to say, “We’re doing this for us, I mean you.” Just don’t think they are doing anything altruistic here. They are in it eyeball deep and the SEC is trying to scalp them.The outcome of that cage match can be a partial/preliminary injunction, a permanent injunction, a disgorgement of the funds, a reversal of the deal, and a ban from being involved with public securities for 5-15 years as well as a prohibition against serving on public company boards for individuals. Or, ALL OF THE ABOVE.This is a little more serious than a heart attack. It is like a heart transplant being done with a blindfold on.When you are writing a novel, your editor will say to you, “Create a sense of ‘stakes’ — something of huge value that can be lost.”The stakes in this case may be the entire company.A bad ruling would be a disaster both from a penalty perspective and a legal fee perspective. Kik would have no alternative but to appeal. The SCOTUS would have to feel really bad about Howey to take a case that would potentially overrule it. There is no evidence that Howey is not loved, respected, and revered except by people issuing ICOs.The question somebody has to answer is who authorized this ICO without doing a bit more due diligence? The SEC raised their first questions two days after the ICO, so somebody at the SEC had formed an opinion early in the game.One bright spot is that the SEC has recently issued and whispers it will shortly issue a few Notice of No Action letters to crypto folk. Before you break out the champagne, these are primarily the result of the SEC and the cryptonoid working out their differences — in many instances the cryptonoid admits its issuance was a security.Last point — the SEC isn’t stupid. They look at all the promotional materials for an ICO and the company. One of the damning bits of evidence is a video or two from the company that clearly says something along the lines of the words that would accompany a security.Something like, “Somebody’s going to make a jillion dollars on this deal.”It is not quite “touting” but it is going to be problematic.Good luck, but this is now officially a shit storm.JLMwww.themusingsofthebigredca…

    1. Richard

      Cryptocoins continue to be the opioid of technology. When you make arguments to avoid the law, ignoring hundreds of years of securities frauds, you hold up the shield of “changing the world” to make yourself feel better.

    2. Rick Mason

      JLM I don’t know enough about the law to know if you’re right. But I sure do like how you present your case counselor. As you like to say well done Sir.

      1. Rick Mason

        I want to state that I have Kik on my phone though I am not a very active user. Basically I think they’re a very innovative company and I want to follow their journey. It would be a shame if their company is defeated in the courts and not in the court of public opinion. But for every Uber that prevails in the courts there’s a few startups that do not.

    3. sigmaalgebra

      I don’t know the law, but that post looks really good, like at least someone has been there, done that, got the T-shirt and learned more since.Legal mud wrestling with the SEC over security regulations: Garbage, stink-o, pig sty stench, unpredictable crap-ola, rampant irrationality are really upsetting. How the heck am I going to slog through the usual unpredictable, absurd exogenous nonsense and still do the thinking and work for the best startup since sex when I encounter such upsetting garbage, …?Long to me crypto and ICOs smell like dead fish after a lake was drained last month, in Texas; it’s just a smell, and I don’t know the details.So, your post does a great job of turning on the clarifying, sterilizing lights, flushing out the garbage, …, and letting us enjoy nice things and get good work done again.

    4. sigmaalgebra

      Halt! Stop the presses! Breaking news! This just in: At…is:SEC Charges Issuer With Conducting $100 Million Unregistered ICOFOR IMMEDIATE RELEASE2019-87Washington D.C., June 4, 2019 —The Securities and Exchange Commission today sued Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens. The SEC charges that Kik sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws.

  6. Chris Phenner

    I got a ton out of this listen, and I appreciate the share.I love when a modern legal issue ties back to older cases, as this one does in relation to the orange grove, and how ‘leasing’ land created a foundation for ‘a security’ and helped to define when folks were ‘in business together’ (as Ted put it so well).’Fonovisa v. Cherry Auction’ was a foundational case cited during Napster litigation, comparing file-sharing to a ‘swap meet’ (offline). It’s not that the analogy was perfect (as it rarely is), but the older form of the litigation clarified the principles at stake.I also enjoyed hearing (and bristled at) the firms who sought SEC permission and who folded to accept designations as ‘securities.’ Not because I think those firms did the right thing, but because it made so clear that Kik feels strongly enough to take a stand.Thanks for sharing a Good Fight. We have so many bad ones afoot.

  7. jason wright

    To do that someone would need to construct a plausible legal argument. So in what way is the SEC being unconstitutional?