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The ZuckerBezos Clause: SEC Opens Door For Facebook, Slams It On Crowdfunding

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The SEC has issued non-binding guidelines on token sales and ICO crowdfunding initiatives, laying out the foundation for a repressive approach to digital assets that will favor incumbents at the expense of emerging enterprises.

The ICO is not a perfect vehicle for fundraising. It has been proven to be easily-manipulated, and many of the promoters of token sales were clearly in it for one reason only: personal enrichment. With that in mind, the SEC’s motives in seeking to protect investors are to be applauded, even if its methods may be flawed.

Without the ICO we would have no Ethereum – at least, not in the sense we have it today. The billions of dollars of economic value created by crowdfunding through digital token sales may well not exist. The entire Ethereum ecosystem does not yet have an obvious and commercially-successful use-case beyond generating economic activity; yet it is clear that Ethereum and its brethren represent nascent enabling technologies that could change the world.

But the new guidelines would nix an Ethereum crowdsale today.

What Is The Point Of Crowdfunding?

Sometimes great ideas come to millionaires, and sometimes they don’t. That’s why we have Kickstarter and Indiegogo. These platforms allow ordinary people – who may not have the cash to leave their jobs and focus on bootstrapping their idea, and who may not  be tight with Silicon Valley venture capitalists – to leverage the power of the crowd. Great ideas may get funded… Kickstarter alone has raised $3.6 billion since 2009 for its participants.

Equity crowdfunding is still reasonably new to the U.S. and even Forbes made the pointed assertion that since its introduction, just 1,400 entrepreneurs have sought to raise money via Regulation Crowdfunding or Regulation A+ through November of 2018. According to, just 348 Reg C. campaigns successfully raised money, totaling $156.8M. The numbers are dismal.

Compare that to VC investment, which was responsible for ~8950 deals in 2018. As Jason Rowley at CrunchBase gleefully informs us, “It was a year of superlatives: the most amount of money invested in the highest number of private tech company financing events on record; the largest venture capital deals in history; the rise and rise of supergiant venture rounds; and the elephantine funds that shake the market with every deal they make.”

And with deals totaling ~$131 billion in 2018, it’s easy to see that equity crowdfunding isn’t even a drop in the bucket. At only 0.12% of total dollars raised for early stage ventures, it’s barely a whisper in a hurricane.

Which is why entrepreneurs have looked for alternatives.

The opportunity to access global interest in a technology product and to convert that interest into dollars has previously been unavailable. Sure, a couple of guys in started Google in a garage. (It was VC-backed from the first investment.) Sure, Zuckerberg created Facebook for his friends. (It was VC-backed from the first investment.)

There is ravenous global interest in finding an opportunity to invest in early-stage companies. Digital assets as we know them may not confer ownership rights, but they undoubtedly satisfied a hunger for the chance to participate and to profit.

What Is The SEC Telling Us: Building A Product or Network

Many of the digital assets that were sold during the ICO boom are likely to be classified as securities – meaning that those who sold them have contravened U.S. securities law, and may be required to comply or provide reparations. Some already have.

It’s no coincidence that the SEC released a no-action letter for the TurnKey Jet token sale proposal on the same day, which can be used in conjunction with their guidelines to safely infer several points.

The guidelines offer significant room for interpretation, but the key takeaway for those who seek to raise money to build a product is… no.

“Although no one of the following characteristics is necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the “efforts of others”…

An AP [Active Participant] is responsible for the development, improvement (or enhancement), operation, or promotion of the network,[15] particularly if purchasers of the digital asset expect an AP to be performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality.[16] …|… Where the network or the digital asset is still in development and the network or digital asset is not fully functional at the time of the offer or sale, purchasers would reasonably expect an AP to further develop the functionality of the network or digital asset (directly or indirectly). 

The SEC is essentially saying that using the proceeds of a token sale to develop a product is likely to fall foul of the Howey test. And of course, that’s almost exactly what hundreds of token sales have been all about. In fact, it’s what crowdfunding in general is all about.

The no-action TurnKey Jet letter spells this out even more clearly:

“TKJ will not use any funds from Token sales to develop the TKJ Platform, Network, or App, and each of these will be fully developed and operational at the time any Tokens are sold…”

The SEC confirms this with another example in its guidelines, in a paragraph that seems an open invitation for Facebook or Amazon to enter the market without fear – an example I will now refer to as the Zuckerbezos clause.

For example, take the case of an online retailer with a fully-developed operating business.  The retailer creates a digital asset to be used by consumers to purchase products only on the retailer’s network, offers the digital asset for sale in exchange for real currency, and the digital asset is redeemable for products commensurately priced in that real currency.  The retailer continues to market its products to its existing customer base, advertises its digital asset payment method as part of those efforts, and may “reward” customers with digital assets based on product purchases.  Upon receipt of the digital asset, consumers immediately are able to purchase products on the network using the digital asset.  The digital assets are not transferable; rather, consumers can only use them to purchase products from the retailer or sell them back to the retailer at a discount to the original purchase price.  Under these facts, the digital asset would not be an investment contract.

What you’re reading here is pretty simple if you’re familiar with the concept of gift cards, and reflects an appetite on the part of the SEC for fiat-pegged stablecoins.

What Is The SEC Telling Us: Stablecoins, Profit, And Exchanges

The SEC really, really doesn’t want anyone selling tokens that have the potential to make profits for their buyers, or that have value beyond the closed ecosystem within which they are created. It’s a curmudgeonly approach, that neatly yanks the second leg out from the stool supporting crowdfunding in the world of digital assets.

Prospects for appreciation in the value of the digital asset are limited.  For example, the design of the digital asset provides that its value will remain constant or even degrade over time, and, therefore, a reasonable purchaser would not be expected to hold the digital asset for extended periods as an investment.
Restrictions on the transferability of the digital asset are consistent with the asset’s use and not facilitating a speculative market.

TurnKey Jet letter, again:

  • TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform;
  • TKJ will sell Tokens at a price of one USD per Token throughout the life of the Program, and each Token will represent a TKJ obligation to supply air charter services at a value of one USD per Token;

A legitimate token sale is no longer therefore a crowdfunding effort, it is simply a way of tokenizing an asset. The benefit for the seller now seems restricted to two concepts:

  • Reduction of friction for transactions within the closed token ecosystem
  • Retention of customer funds / loyalty within the closed token ecosystem

The Future Of Crowdfunding – Or Otherwise

We all knew that guidelines like this were on the way, and as crypto lawyer Preston Byrne rightly puts it, “There’s really nothing new here.”

But there was always a glimmer of hope – that the SEC would somehow see value in the immense potential of regulated digital assets beyond the mere representation of fiat currencies. We saw progress in Wyoming and Colorado, and we crossed our fingers that the enforcement agency would recognize that technology requires new thinking – not simply the applicability of old thinking to a new reality.

This isn’t new, and it’s still reliant on Howey, a case that may as well have emerged from the Middle Ages. The guidelines on profits, I can understand. Stamp out the bad guys by minimizing the opportunity to do bad things. Admittedly, it’s a little like banning cars because a lot of people speed, but at least there’s a logical thought behind it.

But the restrictive SEC guidelines on building a product or network are outrageous. This Luddite approach dissuades entrepreneurs from building anything of value, by making it almost impossible for them to raise the funds to do so.

America is a capitalist country: we are supposed to celebrate invention – and yet here we are, telling our best and brightest that it’s VC or nothing.

You don’t know any venture capitalists? I guess you don’t have any good ideas.

This is a pattern of paternal protectionism more readily comprehensible in a socialist regime than in a free market. Accredited investors… Regulation CF limits on fundraising and disclosures… these are well-meaning nanny state rules that protect corporations from invention just as much as they protect investors from exploitation.

There’s more to digital assets than speculation. There’s also more to digital assets than tokenization.

It’s a shame the SEC saw fit to green-light incumbents like Facebook, Amazon, and JPMorgan – where executives will be chortling into their brandies while reading these guidelines.

And if that sounds a little Socialist, I can’t help but say – well, yeah. Because if the modern version of American capitalism refuses to endorse a genuinely free market or the right to voluntary exchange, what the hell is the point of this economic system anyway?


The author is invested in digital assets.

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