- On June 14, 2018, Director William Hinman of the SEC’s Division of Corporation Finance delivered a speech at the Yahoo! Finance All Markets Summit in San Francisco, during which he shared his view that current offer and sale of bitcoin and ether, the two most valuable and prominent digital assets today, does not constitute a securities transaction.
- Reiterating the facts-and-circumstances approach the SEC takes in applying securities laws to digital assets, Hinman admitted that the evolvement and the decentralized nature of digital assets could at some point render the application of securities laws requirements insensible and unnecessary.
- Hinman’s speech is the first public statement from SEC leadership that offers clear assurance that certain types of digital assets are not within the purview of SEC regulations.
- The SEC has been following and monitoring the development of ICOs and digital assets closely. This article traces the series of SEC actions leading up to Hinman’s speech and analyzes how the SEC’s jurisprudence in this field has developed overtime.
The recent popularity of cryptocurrencies and blockchain-based tokens among investors has raised implications under U.S. securities laws, including whether these tokens are securities.
Legal issues aside, as a simplified illustration, a blockchain is a “shared digital ledger, also called a distributed ledger, for storing and tracking transactions,” with each peer user of the ledger holding a unique digital key to the ledger. Blockchains and, more broadly, distributed digital ledgers are often touted as having an revolutionary effect on how transactions can be conducted and how people can interact with each other by eliminating intermediaries. Numerous variations of such digital ledgers currently exist on the market; they were mostly developed by different consortiums that consist of technology companies and/or financial institutions.
The digital assets that move across a blockchain or a distributed ledger are termed “tokens,” “coins,” or “cryptocurrencies.” Among the most common existing coins are bitcoin (originated on the original blockchain) and ether (originated on the well-known ethereum ledger), which can be easily exchanged for fiat currencies (e.g., U.S. dollars) in the open market and used to purchase other digital (and even nondigital) products, thus bearing a strong resemblance to the traditional concept of currency.
Technology companies and even traditional business entities have come to realize the potential of blockchain’s commercial use and are using it in a number of ways. One of those ways is an initial coin offering (ICO) that is expected to lead to the completion of blockchain-based projects. An ICO is an event in which a blockchain-based project or entity raises capital by issuing tokens to purchasers in exchange for a contribution of value in the form of either fiat currency or digital currencies.
The rest of this article will explain why ICOs and digital assets in general implicate the U.S. securities laws. Part II gives an overview of the orders, actions, and statements by the Securities and Exchange Commission (SEC) leading up to Director Hinman’s speech (the Hinman Speech), including the famous “The DAO Report” and the SEC’s cease-and-desist order against Munchee Inc. (Munchee Order). Part III points to alternatives to ICOs that are less likely to run afoul of the securities laws and SEC regulations. The purpose of this article is two-fold: (1) to analyze how the SEC applies old laws to emerging issues and develops its jurisprudence, and (2) to provide some guidance to counsels and practitioners who are or will be structuring a transaction involving digital assets.
II. The SEC’s Developing View on Digital Assets
Like bitcoin or ether, digital assets sold today can function as a medium of exchange, unit of account, or store of value. Increasingly, however, these tokens begin to represent other rights, such as a right to participate in the developer’s profit distribution or a right to access the blockchain-based platform once it is placed into commercial production. Depending on the circumstances, these other rights could cause digital assets to fall in the definition of “securities” under the Securities Act of 1933 and the Securities Exchange Act of 1934 (collectively, the Securities Laws).
Under the Securities Laws, all securities offered and sold in the United States must be registered with the SEC or must qualify for an exemption from the registration requirements. In addition, any entity or person engaging in the activities of an exchange must register as a national securities exchange or operate pursuant to an exemption from such registration. Thus, whether a token is a security becomes crucial for token issuers and people who facilitate the promotion and issuance of tokens. As discussed below, the SEC evaluates whether tokens are securities by considering whether they are “investment contracts,” which must satisfy the Howey test: The instrument is (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) to be derived from the entrepreneurial or managerial efforts of others.
1. Pre-Munchee Order SEC Actions and The DAO Report
Before ICOs heated up in the latter half of 2017, the SEC brought sporadic actions against security intermediaries alleging fraudulent behaviors. However, in those administrative proceedings or cases, bitcoins or digital tokens were only tangential ingredients that were not the focus of the SEC’s analyses.
The DAO Report published in July 2017 represented the first instance in which the SEC truly opined on the nature of digital tokens. The blockchain company Slock.it created and sold DAO tokens to the public in exchange for ether. DAO tokens granted token holders certain voting and ownership rights. According to the company’s promotional materials, DAO token holders would share in the anticipated earnings from projects funded by their investment in DAO tokens and would have the ability to make a profit by reselling DAO tokens in a secondary market.
In evaluating whether DAO tokens are securities, the SEC did not hesitate to apply the Howey test: “[A] security includes ‘an investment contract’ . . . . This definition embodies a ‘flexible rather than a static principle’ [and] in analyzing whether something is a security ‘form should be disregarded for substance.’”
Observing that “‘money’ need not take the form of cash” and that DAO token holders gave something of value (i.e., ether), the SEC quickly concluded that the first prong is met. Next, given that ether contributed by DAO token holders was pooled and made available to the DAO platform to fund projects, the returns on which would be shared by holders, purchasers of DAO tokens invested in a common enterprise and reasonably expected profits in the form of “increased value of investment.”
Most ink was spilled on the last prong that the profit is to be derived from “the entrepreneurial or managerial efforts of others.” The trick, compared to the facts that made the first three prongs an easy pass, is that DAO token holders did have some voting right to decide what business projects to be deployed. The question was whether the managerial efforts of Slock.it were nonetheless the significant ones driving the value of The DAO in light of DAO token holder’s decision-making power as to projects. The SEC answered in the affirmative because: (1) Slock.it and its co-founders held themselves out as experts in the ethereum network and led investors to believe they could be relied on to make The DAO a success; (2) Slock.it and its co-founders actively monitored, operated, and safeguarded The DAO and investor funds; (3) DAO token holders could vote only on proposals filtered by Slock.it and its co-founders using limited information provided to the holders and had no role in negotiating terms of the contracts; and (4) there was no practical way for DAO token holders to consolidate their votes into powerful blocs. In other words, “the voting DAO Token holders [had were] akin to those of a corporate shareholder.” Because DAO token holders were unable to assert actual control over the business, they necessarily relied on the managerial and entrepreneurial efforts of Slock.it and its co-founders.
Through The DAO Report, the SEC spoke directly to digital token issuers for the first time. In a certain sense, the message conveyed in The DAO Report was a mild, friendly warning given that the SEC decided not to pursue any enforcement action, and a considerable portion of the report reiterated the Securities Laws, which in retrospect might be unfortunate because practitioners and businesses mistook it for an opportunity to test the regulator’s limit. Another aspect of The DAO Report that tends to be downplayed is the SEC’s reminder that a marketplace meeting the definition of an “exchange” under the Exchange Act on which securities (including digital assets that are securities) transactions take place must register with the SEC pursuant to the Securities Laws and regulations. This “afterthought” that was squeezed in to the end of The DAO Report turned out to be crucial in the SEC’s more recent enforcement activities, as discussed below.
2. The Munchee Order
Many think The DAO is not even a close case; after all, except that the instruments were called “tokens,” not “shares,” DAO tokens shared many of the attributes of a traditional equity stock. Creative people predictably would not allow their tokens to be pigeonholed to the type of “security tokens” created by The DAO.
The thinking prompted the burgeoning of the so-called utility tokens, which replaced the profit-sharing attribute of DAO tokens (or the like) with a certain consumer utility attribute. In fact, token issuers can customize the terms of the tokens in whatever way they see fit, typically in an informational “white paper” document from which prospective purchasers know to what features of the tokens they are subscribing. Utility tokens represent a right to use the issuer company’s products or services instead of any interest in the company itself. After The DAO Report, an increasing number of companies began issuing utility tokens to raise funds for the development of its products or services to which prospective token holders will have access.
On December 11, 2017, the SEC issued a cease-and-desist order against Munchee Inc., a California company that created an iPhone app for reviewing restaurants, for offering and selling unregistered tokens, which in the SEC’s view was a security. Notably, the Munchee Order was the first SEC enforcement action against an ICO that made no fraud allegations. The tokens sold by Munchee (MUN tokens) were utility tokens allowing holders to purchase goods or services in the to-be-improved “ecosystem” of the app. The SEC found that Munchee indicated that it would take steps to increase the value of the tokens, which made purchasers of MUN tokens to have a reasonable expectation of obtaining future profits predominantly from the efforts of Munchee and its agents. Accordingly, the SEC found that MUN tokens were securities, and the offering and sale of MUN tokens was subject to the Securities Laws.
Applying the same Howey test, the Munchee Order focused on the third prong: a “reasonable expectation of profits.” This is a sensible approach because when people buy a garden-variety merchandise, they are paying for the utility offered by the merchandise, not its potential to appreciate in value; even though it is plausible that certain consumer goods could increase in value over time, this alone usually is not what motivated consumers to make the purchase in the first place. By building in MUN tokens a feature that would allow holders to engage in various activities in the new app ecosystem (i.e., consumer utility), Munchee was pulling MUN tokens out of the investment instrument basket and putting them into the consumer goods basket. The implication was that purchasers of MUN tokens probably did not have a reasonable expectation of profits.
The SEC took issue with Munchee’s strategy, and the Munchee Order on the whole exemplified how the SEC interpreted “form should be disregarded for substance.” Not limited by Munchee’s self-labeling, the SEC looked at facts evidencing a reasonable expectation of profits among MUN token purchasers, including: (1) although Munchee told potential purchasers MUN tokens could be exchanged for goods or services after Munchee created an ecosystem, no one was able to buy any good or service with MUN tokens before the ecosystem became operational; (2) on Munchee’s website and in its white paper, Munchee indicated that “MUN tokens would increase in value”; (3) in public appearances, Munchee and its agents primed purchasers’ expectation of profit through statements and endorsements of others’ statements that MUN tokens would increase in value and that purchasers would receive a significant return by buying MUN tokens early; (4) Munchee specifically targeted potential purchasers interested in investing in cryptocurrencies, not its app users or restaurants, by promoting MUN tokens in digital asset investment forums where prospective investors gather and paying third parties to publish promotional statements in those forums; and (5) Munchee intended that MUN tokens would trade in a secondary market, and Munchee represented that it would buy or sell MUN tokens using its retained holdings in order to ensure a liquid secondary market. Munchee did much more than a garden-variety retailer would do to promote its merchandise but at the same time neglected what a retailer should do—to market the good to people who find it most useful. Taken together, these facts support the SEC’s conclusion that Munchee was priming prospective purchasers’ expectation of profits.
The Munchee Order tells us that whether a token is called an investment token or a consumer good, the inquiry does not stop there. The Munchee Order went so far as to say, “Even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security.” It is unnecessary for the SEC to make statements on facts that were not present in the instant case; perhaps the SEC wanted to show its strong determination that the economic-reality analysis would be applied in each and every case involving ICOs and to deter issuers who would try evading scrutiny by introducing the slightest variation to its digital assets.
3. Post-Munchee Order SEC Actions
On the same day that the Munchee Order was issued, SEC Chairman Jay Clayton released a statement to both main street investors and securities market professionals who play a role in ICOs. Predictably, the statement picked on utility tokens: “Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.” Chairman Clayton, however, left it open to structuring an ICO not involving the offering of securities. He noted that, “a participation interest in a book-of-the-month club may not implicate  securities laws,” whereas “many [utility] token offerings appear[ed] to have gone beyond this construct and [were] more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come.” It is yet to be seen what kind of utility tokens is (or is not) akin to a participation interest in a book club that is already built and running. All we know is that no lines will be drawn, and the same case-by-case factual analysis will continue to apply.
The Munchee Order set in motion a series of efforts targeting the ICO market in a broader scope. The Clayton statement not only cautioned investors against investing in cryptocurrencies or ICOs without making adequate inquiry into the specifics of an offering, but also called on market professionals (e.g., broker-dealers, investment advisers, exchanges, and lawyers) to focus on “the protection of our Main Street investors” by ensuring that offerings of securities be accompanied by important disclosures, and the Securities Laws be complied with in all respects. This message echoes The DAO Report’s warning that a marketplace where trading of securities occurs must register as a national exchange or, if certain conditions are met, a broker-dealer. Lastly, the Clayton Statement “promised” that “the SEC’s Division of Enforcement [would] continue to police this area vigorously.”
In the same vein as the Munchee Order and the Clayton statement, the SEC continued to closely monitor ICO-related activities, but the SEC’s post-Munchee Order focus seemed to be shifting from token issuers to market professionals who facilitated ICOs. In January this year, Chairman Clayton sent additional warning signals to securities professionals, especially lawyers, that when the ICOs had many of the key features of a securities offering they should counsel clients that the product being promoted was likely a security. The chairman observed that “federal securities laws apply regardless of whether the offered security . . . is labeled a ‘coin’ or ‘utility token,’” and that the SEC was “disturbed” by “form-based arguments” made by lawyers, trading venues, and financial services firms that “depriv[ed] investors of mandatory protections.”
On February 21, 2018, the SEC filed a complaint against a bitcoin-denominated platform and its founder for, among other things, operating an unregistered securities exchange. An SEC official stressed that “[p]latforms that engage in the activity of a national securities exchange, regardless of whether that activity involves digital assets, tokens, or coins, must register with the SEC or operate pursuant to an exemption.” As already reminded in The DAO Report, a system meeting the definition of an “exchange” is “any organization, association or group of persons . . . which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities” and must register as a national securities exchange or operate pursuant to an appropriate exemption, one such frequently used exemption being an alternative trade system (ATS) that can register as a broker-dealer and comply with only Regulation ATS. In any event, for an entity operating a digital token system or considering to operate one, as well as lawyers advising such an entity, it is worth reading the Regulation ATS adopting release and studying the illustrations in that release.
4. The Hinman Speech
Half a year after the Munchee Order, the Hinman Speech marks another milestone in the SEC’s public dialogue in the digital assets field. Perhaps most interesting to the digital asset industry is the much-anticipated reassurance that ether is not a security. From the perspective of the Securities Laws, the Hinman Speech repeats and continues The DAO Report and the Munchee Order: (1) how the instrument is labeled bears no significance on the Howey analysis; (2) the prong analyzing investor’s reliance on a third-party promoter should be given primary consideration when applying the Howey test to digital assets; and (3) whether the creation of a digital asset has a consumer purpose and whether people purchase it out of consumptive motivation will be evaluated based on various objective factors. Whether a digital asset is a security does not inhere to the instrument; rather, the real question is whether the manner in which it is offered and sold creates a reasonable expectation of profits to be derived predominantly from the promoter’s efforts. This explains why simply restyling a digital asset as a “utility token” is doomed to fail.
Apart from crystalizing the entire Howey test into the last two prongs in the context of applying the Securities Laws to digital assets, Hinman implicitly made a pragmatic argument when addressing why ether and bitcoin should not be securities:
The disclosures required under the federal securities laws nicely complement the Howey investment contract element about the efforts of others. As an investor, the success of the enterprise . . . turns on the efforts of the third party. . . . Without a regulatory framework that promotes disclosure of what the third party alone knows of these topics and the risks associated with the venture, investors will be uninformed and are at risk. . . . [I]f the network on which the token or coin is to function is sufficiently decentralized—where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts—the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede.
Because both bitcoin’s and ether’s operation and their respective networks are so decentralized that basically every user is on the same page and no central third party determines the fate of the network, “applying the disclosure regime of the federal securities laws to the offer and resale of [bitcoin and ether] . . . would add little value.” In other words, protection under the Securities Laws will be meaningless because there will not be a promoter to be sued and be held accountable in the event bad things happen.
Hinman noted that most of the ICOs he has seen have touted promoters’ ability to create an innovative application of the distributed ledger technology and targeted passive investors, and the lack of a clear business model often left purchasers no choice but to rely on the efforts of the promoters to build the network. Therefore, even though digital assets offered in those ICOs are not technically securities themselves, just like orange groves in Howey, “[a]t that stage, the purchase of a token looks a lot like a bet on the success of the enterprise and not the purchase of something used to exchange for goods or services on the network.” Hinman indicated, however, that the network on which certain digital assets operate may eventually mature, and at some point those digital assets would become the new “ether” to which the application of the Securities Laws would add little value.
III. Alternatives to Noncompliant ICOs
If a network could achieve the same degree of decentralization as the bitcoin network or the ethereum network, then it would probably be blessed by the SEC. Outside bitcoin and ether, however, regulatory uncertainty still accompanies each and every coin offering in the United States, and it is rare, if ever possible, for a network to begin in a sufficiently decentralized form. As suggested by Hinman, one way around this is to begin fundraising through traditional equity or debt offering, and once the network is up and running, distribute blockchain-based digital assets to potential users. Nevertheless, this route may not be desirable or executable for all digital asset issuers, and separating fundraising from token sale may deprive some crypto-enthusiasts’ opportunity to participate in the early stage of developing a perhaps groundbreaking project. The rest of this Part III briefly outlines three options for structuring legally compliant ICOs: Regulation D, Regulation S, and Regulation A.
Citing Regulation D, Chairman Clayton acknowledged that “[i]t is possible to conduct an ICO without triggering the SEC’s registration requirements,” which provides a private placement exemption. The private placement exemption, Rule 506(c), allows an issuer to raise an unlimited amount of capital so long as there are no more than 35 purchasers who are not “accredited investors” (AI), and the non-AI purchasers, either alone or with their representatives, possess a certain level of financial sophistication.
Similar to what people can do in other unregistered offerings, an ICO can be structured to comply with Regulation S such that the digital assets will be deemed to be offered and sold outside the United States and not subject to the SEC’s jurisdiction. Regulation S requires that each offer or sale of securities by an issuer be made outside the United States: (1) in an “offshore transaction,” (2) with no direct selling efforts in the United States, and (3) be subject to any additional conditions as determined by the category of the securities being offered or sold.
The third alternative is Regulation A, which as amended by the JOBS Act in 2015, allows a qualified issuer to raise up to $50 million from the public without complying with the full SEC registration process. However, the issuer may only sell to non-AIs if the purchase price paid by such non-AIs does not exceed 10 percent of the greater of their annual income or net worth (for natural persons) or 10 percent of the greater of its revenue or net assets (for entities). The issuer must file an offering statement, and the SEC must qualify it before the issuer can start to sell the securities.
There are, however, obvious tradeoffs associated with the exempted offerings discussed above, including restrictions on publicity, investor qualifications, and limited resales, which may in some cases decrease the appeal of an ICO as a means of raising capital. For example, under Regulation D, general solicitation is disallowed if the digital assets, assuming they are securities, end up being sold to non-AIs. In addition, digital assets offered pursuant to Regulation D and Regulation S are not freely transferrable in a secondary market. From the perspective of a prospective purchaser, digital assets offered pursuant to these exemptions might be less desirable because the investor verification process (i.e., to verify the AI status for Regulation D offerings, and for Regulation S offerings to verify the non-U.S. person status) goes against the pseudonymous principle of most distributed ledgers. Regulation A, on the other hand, seems to have fewer publicity and resale limitations, but the $50 million cap may not satisfy ambitious entrepreneurs’ capital need (or expectation).
At the end of 2017, the SEC began to send subpoenas and information requests to technology companies and, remarkably, to their advisors and lawyers as well. “[T]he wave of subpoenas includes demands for information about the structure for sales and pre-sales of the ICOs”—the “most concrete sign of the SEC’s intention to crack down on the sudden emergence of coin offerings.”
Before any congressional action to carve out a special regulatory regime for blockchain and cryptocurrency, the 1946 Howey test will continue to guide the SEC’s analysis and perhaps the courts’ analysis as well. As the SEC becomes impatient with token issuers and their advisors, it is difficult to make more creative arguments without confronting the SEC head on, and it is probably more prudent to seek the SEC’s view before proceeding with any definitive offering plan. According to Director Hinman, “[the SEC is] happy to help promoters and their counsel work through these issues. We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use.”
What all this means for lawyers is that when clients seek advice in connection with ICOs, which clients may include token issuers, ICO promoters who played a similar role to underwriters, and trading platforms that may be viewed as unregistered exchanges, lawyers should ask whether the proposed action will compromise the purpose of investor protection laws and regulations, the lens through which the SEC is determined to scrutinize the markets for digital assets.
Of course, none of the above is relevant to fraudulent ICOs. Any fraud, not just fraudulent ICOs, deserves to be hit as hard as possible.
*I am grateful to Rebecca Simmons for her helpful guidance and comments. All views expressed in this article are my own.
 Tawnya Plumb, Blockchain: What’s in It for Lawyers?, 41 Wy. Law., Feb. 2018, at 50. The decentralized feature of blockchains is thought to make a blockchain more immune to hacking than a centralized database. Id.
 See Peter Gratzke, David Schatsky & Eric Piscini, Banking Together for Blockchain: Does It Make Sense for Your Company to Join a Consortium?, Deloitte Insights, Aug. 16, 2017 (noting that a growing number of companies join together to develop new distributed ledger-based infrastructures).
 See Arjun Kharpal, All You Need to Know About the Top 5 Cryptocurrencies, CNBC, Dec. 14, 2017 (showing that, as of the end of 2017, market cap of bitcoin was $275.1 billion and that of ether was $71.1 billion); Elise Moreau, 13 Major Retailers and Services That Accept Bitcoin, Lifewire, Mar. 7, 2018 (listing major consumer vendors that accept bitcoins as payment method). Bitcoin, ether, and other coins having similar attributes to real-world currency are sometimes called “cryptocurrencies.” Cryptocurrencies and other types of tokens are generally referred to as “digital assets” in this article.
 See SEC Investor Bulletin: Initial Coin Offerings (July 25, 2017) [hereinafter SEC Investor Bulletin] (noting that developers, businesses and individuals are using token sales to raise money for developing digital platforms). In fact, an ICO turned out to be an astounding device for raising money. As an example, the initial offering of “Basic Attention Tokens,” which allows holders to access a blockchain-based publishing and advertising platform, raised $35 million in 24 seconds. Becker Goldstein et al., Basic Attention Token (BAT) Token Launch Research Report (Oct. 30, 2017).
 William Hinman, Dir., SEC Div. of Corp. Fin., Remarks at the Yahoo Finance All Markets Summit: Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018) [hereinafter Hinman Speech].
 In re Munchee Inc., SEC Release No. 10445, File No. 3-18304 (Dec. 11, 2017) [hereinafter Munchee Order].
 Holden Page, 2017’s ICO Market Grew Nearly 100X from Q1 to Q4, Crunchbase, Jan. 11, 2018, (showing that the ICO market saw an exponential growth in the third and fourth quarters of 2017).
 Cyber Enforcement Actions (last updated Sept. 26, 2018) [hereinafter SEC Enforcement Actions] (listing up-to-date enforcement actions with respect to digital currency/ICOs). In these cases, the SEC alleges fraudulent behavior of certain broker dealers and exchange platforms, but none of these concerns the question of whether the tokens are unregistered securities.
 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, SEC Release No. 81207 (July 25, 2017) [hereinafter The DAO Report] (concluding that The DAO tokens, a digital asset, were securities).
 The Supreme Court identified the characteristics associated with common stock to be: (1) the right to receive dividends contingent upon an apportionment of profits; (2) negotiability; (3) the ability to be pledged or hypothecated; (4) the conferring of voting rights in proportion to the number of shares owned; and (5) the capacity to appreciate in value. Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (1985).
 Since The DAO Report, the SEC filed a complaint on September 29, 2017, against Recoin Group Foundation, LLC; DRC World Inc. a/k/a/ Diamond Reserve Club; and Maksim Zaslavskiy, alleging that a businessman and two companies defrauded investors in a pair of ICOs purportedly backed by investments in real estate and diamonds, and the SEC filed complaint in December 2017 against Plexcorps (a/k/a and d/b/a Plexcoin and Sidepay.Ca), Dominic Lacroix, and Sabrina Paradis-Royer halting an ICO-based fraud that had raised up to $15 million from thousands of investors since August by falsely promising a 13-fold return in less than one month’s time. SEC Enforcement Actions, supra note 15.
 In the context of applying the Howey test, the Supreme Court drew the line between the motivation of a consumer and that of an investor, and only the presence of an investing motivation is relevant to the question whether the instrument is a security: “[W]hen a purchaser is motivated by a desire to use or consume the item purchased . . . the securities laws do not apply.” United Hous. Found., Inc. v. Forman, 421 U.S. 837, 854–53 (1975).
 Public Statement, SEC Chairman Jay Clayton Statement on Cryptocurrencies and Initial Coin Offerings (Dec. 11, 2017) [hereinafter Clayton Statement]. The Clayton statement is not formal SEC guidance or a statement of the SEC, but is instead an informal statement by the chairman.
 The chairman suggested that all (or almost all) of the token offerings he had seen as of his statement involved the offer or sale of securities. The SEC has yet to bring another enforcement action against a nonfraudulent ICO after the Munchee Order.
 To date, the SEC brought seven enforcement actions involving ICOs or digital assets since the Munchee Order, but none involved analysis of whether the token being offered is a security. SEC Enforcement Actions, supra note 15.
 SEC Chairman Jay Clayton, Opening Remarks at the Securities Regulation Institute (Jan. 22, 2018).
 Jay Clayton & J. Christopher Giancarlo, Regulators Are Looking at Cryptocurrency, Wall St. J., Jan. 24, 2018.
 Press Release 2018-23, Security Exchange Commission, SEC Charges Former Bitcoin-Denominated Exchange and Operator with Fraud (Feb. 21, 2018).
 Id. See also 15 U.S.C. § 78e (making it unlawful for any broker, dealer, or exchange, directly or indirectly, to effect any transaction in a security or to report any such transaction unless the exchange is registered as a national securities exchange or is exempted from such registration).
 15 U.S.C. § 78c(a)(1). The SEC Rule 3b-16(a) further refines the definition into a two-part test that the organization must: (1) bring together the orders for securities of multiple buyers and sellers; and (2) use established, nondiscretionary methods under which such orders interact with each other, and the buyers and sellers entering such orders must agree to the terms of the trade. 17 C.F.R. § 240.3b-16(a).
 The SEC leadership has previously indirectly conceded that bitcoin is not a security. See, e.g., Clayton Statement, supra note 35, at n.2 (stating that bitcoin is a commodity and is subject to the regulations of the Commodities Futures Trading Commission). Ether is the second largest virtual currency by market cap (the largest being bitcoin) that can be held and transferred on blockchains, function as a medium of exchange for other goods or services, and be used to create decentralized applications on the ethereum network, making it a much more versatile digital asset than bitcoin. Therefore, considerable legal consequences and commercial disruptions would follow if the SEC declared ether a security.
 Hinman analogized digital assets, which are essentially computer codes, to orange groves in Howey. Neither digital assets nor orange groves are securities by nature, but if promoters offer and sell digital assets in the same way the Howey company sold orange groves (i.e., to cause prospective purchasers to believe that profit can be derived solely from the efforts of promoters), then the offer and sale of computer codes becomes an offer and sale of securities. See Hinman Speech, supra note 8.
 Clayton Statement, supra note 35. Notably, Kodak and its partner filed an SEC notice to offer rights to purchase KODAKCoins in future sales pursuant to Rule 506(c). JD Alois, KODAKCoin to Issue SAFT, Seeks $176.5 Million ICO, Crowdfund Insider, Mar. 19, 2018.
 “Offshore transaction” means (1) the offer is not made to a person in the United States, and (2) the buyer is outside the United States or the transaction is executed outside the United States. 17 C.F.R. § 230.902(h).
 Regulation S divides securities into three categories. Category 1 securities include those issued by “foreign private issuers” as defined in SEC Rule 405. Among other alternatives that are irrelevant here, an offering or sale of Category 1 securities complies with Regulation S if there is no “substantial U.S. market interest” as defined under Regulation S or, if there is substantial U.S. market interest in the securities, the offering or sale is directed to a single country other than the United States in accordance with local laws. Categories 2 and 3 securities consist of securities offered by foreign reporting issuers and U.S. domestic issuers. Regulation S imposes more onerous conditions on these two categories of securities which include, among other things, placing legends on marketing materials, additional undertakings by distributors to comply with Regulation S, and a distribution compliance period during which offer or sale cannot be made to U.S. persons other than distributors. 17 C.F.R. § 230.903.
 The offering statement consists of two parts: (1) notification and (2) an offering circular. 17 C.F.R. § 230.252(a). An offering circular is an abridged version of the traditional disclosure document. Some blockchain companies have filed Form 1-A with the SEC (i.e., the form for Regulation A offerings), but we have yet to see one qualified by the SEC.
 Securities offered pursuant to Rule 506 are “restricted securities,” and any resale must comply with Rule 144 to avoid being viewed as a distribution and, thus, the reseller an underwriter. 17 C.F.R. § 230.202(d). For purpose of Regulation S, a resale transaction will be deemed to occur outside the United States if it is made in an offshore transaction without directed selling efforts in the United States. 17 C.F.R. § 230.904.
 Funderbeam, Initial Coin Offerings Funding Report (Oct. 2017), at 11 (showing that funds raised for the top 10 ICOs in 2017 all exceed $50 million); id. at 4 (average size of ICOs increasing rapidly).
 Jean Eaglesham & Paul Vigna, Cryptocurrency Firms Targeted in SEC Probes, Wall St. J., Feb. 28, 2018.
 Id.; see also Nathaniel Popper, Subpoenas Signal S.E.C. Crackdown on Initial Coin Offerings, N.Y. Times, Dec. 28, 2018.
 As an example, the so-called Simple Agreement for Future Tokens (SAFT) is structured as a sale of the right to purchase utility tokens that will be released in the future; although such rights are admittedly securities and to be offered to AIs only, people using SAFT contemplate that once the investors exercise their right to purchase the utility tokens, the securities (i.e., the rights) disappear and all that is left is the utility tokens, which are pure nonsecurities. Predictably, there is indication that the SEC had SAFT in mind when sending out the waves of subpoenas. See Brady Dale, What If the SEC Is Going After the SAFT?, Coindesk, Mar. 6, 2018.
 Interestingly, Hinman called out SAFT specifically. He warned against applying the opinion expressed in the Hinman Speech to a hypothetical SAFT in the abstract. Instead, he encouraged people with questions on a particular SAFT to consult with securities counsel or the SEC directly. Hinman Speech, supra note 8, at n.15.