Our title’s abductive reasoning is an analogy often applied to determining if something qualifies as a security under the Howey test.* Non-fungible tokens (“NFTs”), ERC 20 tokens used as trading vehicles emanating from blockchain networks and cryptocurrencies have all been under attack to varying degrees. The SEC, under the active leadership of its Chair, Gary Gensler, sees these as many ducks and has taken steps to force registration of these newfound ducks with the Commission. Who, as investors, sponsors, and interested observers, if not participants, in these transactions would want to be swept into the risk of these mosh pits of unsettled regulatory and legal frameworks?
Tokenization and the resultant tokens, whichever used, make for wonderful trading vehicles. Think royalties, gold, emerging art NFTs, real estate, carbon credits, and many more at risk. Tempting certainly, given some of the advantages derived from blockchain visibility, chain of title clarity, immutable recordation, and near frictionless transfers. Yet, in the early days many tokens were hacked, leaving the owners bereft. Using tokens and blockchain networks should happen given some of the advantages if the risks can be mitigated like ironclad security and SEC intervention. The costs of going down this path are not trivial and may not be very compelling today versus alternatives. Aha, aShareX to the fore!
When we built aShareX, we did go down the tokenization/blockchain path. Wow, exciting, a new bright shiny object with advantages. Amazingly, we figured out how to do it; however, a big “But” emerged. Hacking risk, SEC rumbling, and incremental costs cooled the enthusiasm. Hence, our chosen path was to accept and even embrace full current regulatory compliance, save the incremental costs of tokens, and wait for future regulatory clarity. It meant filing with the SEC to seek review of our auction system integrated with an SEC reviewed common stock offering, to our knowledge, a first. KYC/AML, two broker dealers, an escrow agent, a cash custodian, and payment rails were integrated into a cohesive package. And, looking to the future, we said to ourselves that if tokens became regulatorily compliant, we had to be able to move our system to that application without rebuilding from scratch. With a dedicated intensely working team, much help, and funding, we did it.
In short, we have conducted several auctions, filed the offerings to do so, cleared the SEC, collected the funds and issued the securities, all without problem. Now, we are ready for those dispirited tokenizers to move to a new / old system like ours.
*Howey Test from the famous SEC case of 1946 against the Howey Company reaching the Supreme Court: “An asset is an investment contract (i.e., a security) if the asset is an investment of money in a common enterprise, with a reasonable expectation of profits to be derived from the efforts of others.” (See Law360 article for more.)
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