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Another court applies the Howey investment contract analysis to crypto

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On June 25, 2020, the United States Securities and Exchange Commission brought suit in the Northern District of California against NAC Foundation LLC, also known as the NationalAtenCoin Foundation, and Rowland Marcus Andrade, the company’s CEO, alleging that the company had violated the federal securities laws by selling an unregistered, pre-functional version of an “Anti-Money Laundering BitCoin” token, to be known as AML BitCoin.

Unlike some of the other recent high-profile decisions applying the Howey Test, such as SEC vs. Telegram and SEC vs. Kik, the NAC lawsuit involved detailed allegations of fraud in connection with the sale of pre-functional tokens. Andrade was also indicted by the Department of Justice on charges of fraud arising out of the offering, and Jack Abramoff, a federal lobbyist, pled guilty to participating in the fraud.

On Jan. 8, 2021, Judge Richard Seeborg of the Northern District of California rebuffed NAC and Andrade’s motion to dismiss, finding that the SEC’s complaint had sufficiently alleged that there had been an unregistered sale of securities under the Howey investment contract test. NAC filed its motion to dismiss back in October of 2020, alleging misconduct by the SEC as well as advancing the legal claim that AML BitCoin tokens were not securities under the Howey Test because, among other things, the purchasers had been repeatedly told that they could not expect a return on their investment. The SEC responded colorfully arguing:

“If it looks like a duck, quacks like a duck, and has the genetic makeup of a duck, it is, indeed, a duck. It matters not if the seller puts a sign on the bird exclaiming, ‘this is not a duck.’”

The crypto offering

While many of the facts about the NAC offering are in dispute, some things appear to be settled. In October of 2017, NAC posted a “White Paper of AML BitCoin (AMLBit) and its Business Model” on its website. In this white paper, NAC stated:

“AML BitCoin rests on a privately regulated public blockchain that facilitates… anti-money laundering ‘know your customer’ compliance and identifies criminals associated with illicit transactions, while maintaining and strengthening the privacy protections for legitimate users.”

The white paper also explained that the “privately regulated public blockchain” was yet to be fully developed and that the original purchasers would be issued “ABTC tokens,” which could be exchanged one-for-one with AML BitCoin when the blockchain was finished. The ABTC tokens were, in all other respects, pre- or non-functional.

The white paper proclaimed that both ABTC and the eventual AML BitCoin could be traded “on participating exchanges and trading websites” and conceded there was the possibility of appreciation through speculation. A substantial portion of the white paper explains why, in NAC’s opinion, the AML BitCoins should not be securities.

The actual initial coin offering took place from October 2017 to February 2018, with some sales occurring both before and after that time period. Although the white paper indicated a goal of distributing 76 million ABTC tokens to the public in order to raise $100 million, the actual amount raised was approximately $5.6 million, attributed primarily to 2,400 retail purchasers in the United States. The ABTC thereafter traded on a number of online platforms, but at no time did NAC attempt to register the tokens with the SEC.

Applying the Howey investment contract test

Adopted during the Great Depression, the Securities Act of 1933 obviously does not include crypto or digital assets in the laundry list of things that are to be regulated as “securities.” However, the Securities Act, which requires securities to be registered or exempt from registration in order to be legally offered or sold, does include “investment contracts” within the scope of the securities laws. Crypto assets are generally regulated as securities if they fit within the definition of an investment contract.

In the case of AML BitCoins and ABTC tokens, both the SEC and NAC seemed to agree that the appropriate test for whether NAC had sold an investment contract (and therefore a security) was the one set out by the U.S. Supreme Court in 1945 in SEC v. W.J. Howey Co. As described in more detail elsewhere, the application of the Howey Test turns on the following questions:

  1. Did the purchasers invest something of value?
  2. Was there a common enterprise?
  3. Was the reason for their investment an expectation of profits?
  4. Were the purchasers relying on the essential managerial or entrepreneurial efforts of others?

All of those elements must be present in order for there to be an investment contract, although the Ninth Circuit (in which California is located) has collapsed the last two elements into a single factor.

As is true for most crypto sales, the NAC sales met the first element of this test. Since purchasers of the ABTC had either used fiat currency or other convertible digital assets to pay for the pre-functional tokens, they had clearly invested property of value. Instead of arguing that element, the issues raised by NAC in its motion to dismiss focused on its contentions that there were no allegations of a common enterprise in the complaint and that the ABTC investors had not purchased with a reasonable expectation of profits.

Commonality is admittedly one of the most complicated and confusing aspects of the Howey Test, with courts disagreeing about what is required to prove this element. Some courts look to vertical commonality, where the fortunes of the investors are tied to those of the issuer, often through a profit-sharing arrangement. Obviously, crypto offerings generally do not involve profit-sharing per se because purchasers acquire no stake or interest in the issuer’s business or profits. On the other hand, this is not necessarily the only way in which vertical commonality can be proven. For example, where the fortunes of an issuer and investors are tied together by a joint interest in the success and profitability of an asset that is yet to be developed, some courts have found vertical commonality to be present.

In addition, other courts look to horizontal commonality, which occurs where the fortunes of investors are tied together, even if the issuer’s profits are determined on some other basis. Such horizontal commonality is often proven by showing that investments are placed in a common pool from which profits are distributed on a pro rata basis.

In this case, NAC argued that this element was missing because investors were required to acknowledge that there was no pooled interest in any business or other common enterprise. Again, however, not all cases agree that a pooling agreement is necessary. Some courts have found that there is horizontal commonality where proceeds from a sale have been combined in a common fund. In its brief supporting its Motion to Dismiss, NAC pointed to a Ninth Circuit opinion that the foundation suggested required that the promoters “knew” their funds would be pooled together.

With regard to the expectation of profits from the efforts of others, NAC argued that that there was only a single mention in its white paper of the possibility that “tokens could ‘appreciate in value through speculative trading…’” NAC contends that this comment occurred in the course of explaining why AML BitCoin would operate like Bitcoin (BTC) in that profitability would “rely entirely on the expertise of the AML BitCoin’s holder.” NAC also pointed to other documents, such as the terms and conditions, which required purchasers to acknowledge that purchasers “expect no return on investment.”

The court’s ruling

Before considering the text of the Jan. 8, 2020, ruling, it is worth emphasizing that the decision was not on the merits. Because the court was responding to a motion to dismiss, the judge was required to determine whether the SEC had sufficiently alleged facts that would support a verdict if those allegations are eventually determined to be true. In other words, in making this ruling, the court assumed that the facts as stated in the complaint accurately recite what happened. The court was allowed to draw reasonable inferences from those facts in determining whether the action should continue but was not allowed to consider NAC’s opposing views as to what had been said and what happened.

The court, therefore, focused on whether the SEC sufficiently alleged that NAC had sold securities under the Howey investment contract test. The court considered both of the two elements identified by NAC: whether there was a common enterprise and whether the purchasers were expecting profits as a result of their investment. The court very quickly dismissed the argument that there was no common enterprise here, finding that both investors and the issuer would benefit from the development of the AML BitCoin system and that they would share proportionately in any future increases in value since the foundation retained the rights to a sizeable number of AML BitCoins. In the words of the court:

“The ‘fortunes’ of ICO participants—as measured by either the trading value of their ABTC tokens or the future trading value of AML BitCoin—were ‘linked’ to the ‘fortunes’ of defendants—as measured by the trading value of their ABTC tokens, the future trading value of AML BitCoin, or the general success of their enterprise…”

In a footnote, Judge Seeborg specifically noted that this result was consistent with the recent opinion in SEC v. Telegram, where the court found commonality based on the fact that every participant’s anticipated profits depended on the issuer’s success in developing the underlying blockchain.

With regard to whether the investors “reasonably expected profits based on the efforts of others,” the court concluded that the SEC had alleged “ample facts” to suggest both that there would be profits and that those profits depended on the issuer’s efforts. The profit motive was, according to the court, apparent from the fact that there was no use for the ABTC or AML BitCoin other than to hope for appreciation. Given that the demand for these assets would “rely almost exclusively on market perception of defendants’ work product” the court had no difficulty in concluding that the SEC’s complaint adequately pled that the assets sold by NAC were securities.

Conclusion

The ruling on the motion to dismiss in SEC v. NAC is not groundbreaking. It does not make new law with regard to when crypto assets should be considered to be securities. It does not involve anything like the amount of money at issue in either SEC v. Telegram or SEC v. Kik. It does not even dictate the final outcome in the case itself.

It is, however, an early indication in 2021 that the SEC still has crypto sales in its crosshairs, and it is further confirmation that the Howey Test is likely to control when crypto is regulated as a security, absent intervention from Congress or potentially a change in perspective from the SEC itself.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Carol Goforth is a university professor and the Clayton N. Little professor of law at the University of Arkansas (Fayetteville) School of Law.

The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Source: https://cointelegraph.com/news/another-court-applies-the-howey-investment-contract-analysis-to-crypto

Blockchain

SOLANAX Private Sale Is On For The Cross-Chain DEX

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[PRESS RELEASE – Please Read Disclaimer]

The cryptocurrency market has left people wondering about the long-term growth prospects and which cryptocurrency they should invest in. Solanax is an automated market maker (AMM) based on the Solana blockchain, which is set to be a game-changer in the cryptocurrency world.

The SolanaX Platform

After parsing through their team of professionals, whitepapers, their project plans, and unique platform capabilities, there is no doubt that once the platform is up and running in full swing, it will undoubtedly change the way people transact today with its simple interface for the public to trade at a record higher blockchain speed and lower gas fees.

  • There are no time-consuming processes or intermediaries.
  • It offers a very simple interface and lower gas fees while initiating the transactions.
  • Solanax increases blockchain speed and makes it more convenient to transact than its peers in the cryptocurrency market.
  • As Solanax is based on Solana’s Proof-of-History verification concept rather than a Proof-of-Work system (as that of Ethereum’s), it will enable users to leverage Solanax’s phenomenal transaction capabilities (Solanax to handle thousands of transactions in a second as compared to Ethereum’s 15).
  • The most crucial part is that while speeding up blockchain transactions and lowering gas prices, Solanax does not compromise on the security aspect.

The Ongoing Private Sale Of Solanax

Solana blockchain is substantially faster compared to its peers, and the ongoing private sale is an opportunity for crypto enthusiasts and investors to participate in this game-changer prospect.

The private sale is still ongoing until Friday, 25th June.

Total Supply: 80 000 000 SOLD Tokens

There will be 20 Million SOLD Tokens distributed before the CEX listing.

Private Sale: Total available token supply – 10,000,000 SOLD

Period: From 06/06/2021 to 25/06/2021

Token Price: $0.1 with a 3months vesting period

Token Price: $0.15 w/o vesting period

Initial Exchange Offering: Total available supply – 10,000,000 SOLD

Final Words

Solanax aims to revolutionize the DeFi exchange network and enhance efficiency levels to new highs. With DeFi gaining popularity, there is an urgent need for the industry to look beyond the older cryptocurrency platforms like Bitcoin and Ethereum. The sluggish transaction speed is one of the prime reasons for Solanax not preferring the Ethereum-like platforms. Besides, Solanax, with its high blockchain speed, simple interface, and low gas fees, is truly a game-changer for crypto aficionados, and Solanax’s Ongoing Private Sale presents the perfect investment opportunity for investors.

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Source: https://cryptopotato.com/solanax-private-sale-is-on-for-the-cross-chain-dex/

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Blockchain

Ethernity CLOUD: Data Confidentiality Backed By Blockchain

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[Featured Content]

It goes without saying that data confidentiality is one of the hottest topics of the decade. From mega scandals of leaked information to a constant stream of news about large corporations being victims of ransomware, there’s undeniably something lacking in the way data is stored traditionally. For the most part, at least.

The truth is that most users rely on traditional cloud infrastructure. Unfortunately, it has many central points of failure and trust, such as:

  • The centralized nature of the Domain Name System (DNS)
  • The dependency on one or numerous cloud providers for service availability
  • Centralized storage of user information

Blockchain technology and cryptography are quickly becoming a topic that many discuss mainly for its potential to disrupt a range of traditional services – data storage and cloud computing are among them.

Etherenity CLOUD is a project that envisions cloud computing infrastructure to be an environment where the data of users is hosted on a range of systems in a manner that’s both confidential and heavily encrypted. From home computers to professional-grade datacenters, any kind of hardware could be used with Ethernity CLOUD and trust that the information is private while in transition and in general.

EthernityCloud2

Ethernity CLOUD: What is it all about?

If one thing is clear, it’s that centralized data servers have become a primary target for hackers. Less than two weeks ago, CryptoPotato reported that JBS – the world’s largest meat producer, paid $11 million in Bitcoin to ransomware hackers who successfully locked the company out of their data.

Ethernity CLOUD’s infrastructure software is created on top of open-source services and technologies, and the migration from standard, centralized cloud providers to it is relatively simple. This comes as a difference to other decentralized hosting solutions, which tend to be rather complex in their attempts to reinvent the wheel.

The main purpose of the project is to provide blockchain infrastructure to participants so they can run cloud software in a decentralized manner, to rent out their idle or extra hardware, and so forth – all this while also providing incentives for decentralized cloud application developers.

Data Confidentiality and Encryption

Ethernity CLOUD’s architecture is designed in a way to favor the most secure encryption and hashing algorithms. At the same time, it keeps the overhead low in order to prevent performance degradation.

The information that’s being exchanged across the network is encrypted, and the ecosystem is designed in a way that prevents the decryption of information in transit, even with the most advanced cryptographic attacks, including brute forcing and collusion.

Naturally, the encryption of the data at rest is also equally important to Ethernity CLOUD, and it was designed on a trustless business model. The information is stored across the network. However, decentralized cloud service providers are unable to access, read, modify, or even interfere in any way with the node that runs on their machine.

Members of the network, by default, are considered untrustworthy – as it is with other blockchain networks. The software code enforces and ensures the trust, which reassures the decentralized cloud users about the safety of their data.

In turn, all of the above provides ground for the following benefits:

  • Ethernity CLOUD is crucial for freedom of speech in the current internet environment where censorship is prevalent.
  • It can be used as a base infrastructure for an online library.
  • It can be the answer to competitive decentralized services or web applications that demand high availability.
  • Can guarantee high availability of online resources through avoiding single points of failure.
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Source: https://cryptopotato.com/ethernity-cloud-data-confidentiality-backed-by-blockchain/

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Blockchain

Euro 2020: Earn As You Watch

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[PRESS RELEASE – Please Read Disclaimer]

Over the years, the European Championship has always been an exciting competition to look forward to for fans of competing nations and football lovers worldwide. There is the assurance of highly entertaining, unforgettable, and thrilling games as different countries compete for continental glory.

Euro 2020 has undoubtedly met expectations and fulfilled some of those promises, with so much more in the bag as the competition progresses, nearing the knockout stages. Teams like England, Italy, Netherlands, Denmark, Austria, Wales, and Belgium have booked their spots in the next stage, while France, Portugal, Germany, and Spain, known favorites, are yet to qualify.

Building on an impressive run of games under Roberto Mancini, Italy has a flawless run as they top their group with perfect stats. The Netherlands also has an excellent record as they pose a force to reckon with in this edition of the competition.

Belgium also showed class by maintaining a perfect record in the group stage, while Denmark, Austria, and Wales took advantage to book their spots in the next phase of the competition.

As the Euro draws near its most intense, dramatic, and thrilling peak, 1xBit, a leading crypto sportsbook and online casino, has a well-packaged competition, which is on the same plane of intensity as Euro 2020, for all viewers and sports lovers alike.

This competition is EUROMANIA. It is as fun as the name suggests. More importantly, it is highly rewarding!

1xBit EUROMANIA Competition

1xBit EUROMANIA lottery is a carefully designed competition for football lovers and viewers of Euro 2020. As the competition has its favorites, so does EUROMANIA. Many people have significantly benefited from this competition, so you should not be left out, as there are tremendous and handsome prizes yet to be won.

Additionally, this lottery is different from any other you have seen before because joining it allows you to earn crypto as you bet on the Euro. There are various sporting events, vast selection options, and mouth-watering odds.

The steps to joining are simple and direct. Log on to 1xBit, create an account, make a deposit, bet on the Euro, collect lottery tickets and win amazing prizes!

Benefits of Choosing 1xBit

1xBit is a unique betting platform distinct from others because it offers users a fantastic chance of receiving so many benefits. These benefits include:

  • Welcoming Bonus: As a new user, you get the opportunity of earning yourself a reward of 7 BTC as a welcome bonus. This reward is activated after your 4th deposit on the platform.
  • Anonymity: This is yet another benefit you enjoy using the platform. 1xBit does not require any personal information to get started.
  • Instant Payout: You get the chance to have your account funded as soon as you win. No time is wasted in processing your funds as you get them instantly.
  • Multi-currency Account: Whether you have Bitcoin, ETH, XRP, or any other supported altcoin, there is nothing to worry about as you can transact using any of this cryptocurrency.

Enjoy Euro 2020, bet, and win crypto!

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Source: https://cryptopotato.com/euro-2020-earn-as-you-watch/

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