Gabriel Shapiro is a Silicon-Valley-based lawyer specializing in advanced company and blockchain-based transactions. 

Expensive Commissioner Peirce,

I’m a California lawyer who has been energetic in representing know-how purchasers in advanced transactions for over ten years. After eight years primarily dedicated to mergers & acquisitions transactions on the Silicon Valley branches of Dewey & LeBoeuf, Weil Gotshal and Hogan Lovells, I started focusing my work on purchasers constructing blockchain know-how.

Since then, I’ve additionally been very energetic in writing on the intersection of regulation and decentralized programs[1], and, amongst different issues, performed a big position in crafting Wyoming’s 2019 firms code amendments[2] and a safety token protocol for Ethereum[3].

I learn with curiosity your current “Token Protected Harbor Proposal” dated February 6, 2020, and have various ideas thereon that I’m desperate to share.

Within the open-source spirit of blockchain applied sciences, I will likely be posting this letter publicly at or about the identical time as I ship it. Nevertheless, must you be so gracious as to reply, I’ll maintain your response and all follow-up correspondence in confidence except you consent to publication. 

The Fee Understands Blockchain And Is Poised To Present Readability

The Workers’s doctrine of “enough decentralization,” first articulated in William Hinman’s speechDigital Asset Transactions: When Howey Met Gary (Plastic)represents a watershed second within the historical past of U.S. securities legal guidelines, and evidences the Fee’s deep examine and understanding of decentralized blockchain applied sciences. When a blockchain community is “sufficiently decentralized,” it turns into, in impact, a public commons, and the protections of securities legal guidelines are thus neither mandatory nor fascinating. 

Likewise, I applaud and embrace your management in driving regulators and legislators to offer builders and buyers with better ex ante regulatory certainty to information their efforts. The Fee can and will make clear the circumstances wherein a blockchain community is sufficiently decentralized. Your proposed protected harbor is a vital step towards this objective. 

Due to the essential work you, Director Hinman and others have carried out to prepared the ground, the Fee is poised to craft a coverage that balances the issues of defending abnormal markets towards an appreciation for the distinctive guarantees and nature of blockchain know-how. 

Iterating On The Protected Harbor

With this letter I purpose to additional the objectives of your protected harbor whereas additionally suggesting some variations that I imagine would align it additional with conventional U.S. securities doctrine.

U.S. securities legal guidelines have developed in accordance with a time-honored custom of elevating substance over type. In that spirit, the protected harbor is premised on a technology-neutral willpower of when a safety is related to or represented by a token. The protected harbor doesn’t deny that tokens could characterize securities, however supplies blockchain builders with a particular roadmap for securities regulation compliance with out incentivizing market individuals to want token-based financings to conventional ones. 

A revised model of the protected harbor is out there right here. I imagine this proposal needs to be thought-about. The rest of this letter explains a very powerful options of the revised protected harbor and explains the reasoning behind every function. 

Beneath this strategy, the preliminary growth group could make the most of conventional exemptions resembling Rule 506(c) or a certified Tier II Regulation A+ providing to initially promote any pre-mined tokens. Whereas the community is on the trail to enough decentralization, the tokens could commerce as securities on a peer-to-peer foundation by way of decentralized exchanges, on appropriately registered centralized cryptosecurities exchanges or on international exchanges which exclude U.S. individuals and are primarily based in jurisdictions which don’t deal with the tokens as securities. Part 12(g) reporting is tolled by modifying Regulation A+ in order that it now not requires the usage of a switch agent for fairness securities. 

Earlier than “Enough Decentralization”, Open Community Tokens Sometimes Symbolize Securities 

Earlier than we delve into the main points of the protected harbor, it’s first essential to ascertain a shared body of reference for our securities legal guidelines as utilized to tokens.

For the sake of brevity, I’ve avoided a prolonged and citation-heavy dialogue within the model of a regulation assessment article or memorandum of factors and authorities. In fact, I’d be blissful to offer extra element at a later date. 

  1. Nature of Open Community Tokens

In a current enforcement motion, the SEC described how open community tokens could operate as “the illustration of the holder’s proper to the worth underlying it, the mechanism for the [token purchasers] to understand their revenue.”[4] I endorse this attitude. 

Purchasers don’t primarily consider open community tokens as being just like actual property, client merchandise, software program licenses or perishable items resembling whiskey or oranges. Nor are such tokens the “object” of an funding scheme, solely momentarily twisted into serving an funding goal towards their regular nature.[5] 

Fairly, open community tokens—finite in provide and particular to a deployed occasion of a software program protocol—are mechanisms for sharing within the worth of an open community and are designed to understand indefinitely as different individuals work to make the community extra invaluable.[6] Such tokens characterize a significant monetary innovation—a way of investing in an ownerless digital commons—and are greatest understood when thought-about on their very own phrases slightly than reasoning by analogy. 

The acquisition of open community tokens in materials quantities will almost at all times be primarily or completely for funding. We want solely ask whether or not the community is managed by a comparatively small group of affiliated individuals (wherein case such funding is a securities transaction) or whether or not the community is decentralized (wherein case the securities legal guidelines don’t apply). 

  1. Open Community Tokens As Funding Contracts

When such a token is bought, whether or not instantly from the event group or in secondary transactions, by an individual who has an affordable expectation of profiting predominantly from the efforts of the preliminary growth group, and there’s (by advantage of the preliminary growth group’s persevering with financial management or purposeful management of the community) a typical enterprise, our securities legal guidelines entail that an funding contract between the event group and the purchaser exists as a matter of regulation. The contents of the funding contract are the guarantees made by the preliminary growth group to undertake efforts that implicate the Howey check. The guarantees could also be implied, as with a whitepaper setting forth a imaginative and prescient of the thriving token economic system, or they could be express, as embodied in a written contract wherein the preliminary growth group agrees to construct and promote such a community. 

In an excessive case, a growth group could have been very cautious to chorus from making any guarantees, categorical or implied. The event group could even have expressly disclaimed all guarantees and undertakings, and should have secured from preliminary token purchasers a illustration that such purchasers haven’t obtained and aren’t counting on any guarantees from the preliminary growth group.[7]

Nonetheless, the event group should moderately be anticipated to be the predominant driver of token income primarily based on circumstances referring to its operational or financial management of the community. As a result of our securities legal guidelines are non-waivable[8] and elevate substance over type as regards to the canons of building relevant to remedial laws[9], even in such “no-promise” circumstances, an funding contract could also be deemed to exist between the token purchasers and the event group as a matter of regulation. 

  1. Open Community Tokens As Inventory or Different Securities

Our case regulation supplies that the existence of extra typical securities could, the place applicable, be examined “when it comes to their substance (the financial realities of the transaction), slightly than their type.”[10] Thus, open community tokens can also represent different forms of securities past funding contracts.

For instance, tokens on “proof-of-stake” networks share many traits of “inventory”, together with the appropriate to obtain dividend-like staking rewards, negotiability, professional rata voting rights and the capability to understand in worth.[11] Conceptually talking, such open community tokens operate very very like shares of “community fairness”[12] or shares in a “decentralized autonomous company”.[13]

  1. Some Open Community Tokens Could Be Non-Securities at Genesis

Some open community tokens is probably not securities even when the community first launches, as a result of the Howey check is just not glad and the coverage issues underlying the securities legal guidelines aren’t implicated. This can usually (however not at all times) happen when there was no “ICO,” “IEO” or different sale of “pre-mined” tokens. This isn’t, nevertheless, as a result of individuals solely obtain tokens when the community is purposeful and a scintilla of performance is enough to moot the securities legal guidelines. Fairly, it’s as a result of such networks are “sufficiently decentralized” at genesis. 

For instance, “fair-launched” networks like Grin basically resemble a type of common partnership wherein token possession confers a quasi-equity curiosity within the community, however the securities legal guidelines aren’t implicated as a result of all individuals have a extremely knowledgeable, energetic managerial position and aren’t relying predominantly on the entrepreneurial efforts of every other individual(s).[14]

Launches bearing similarities to that of ZCash, wherein the community is developed, because it have been, “on-spec” and the preliminary builders are paid a reward of tokens from every block, like miners, can also fall exterior the ambit of the securities legal guidelines, assuming that the builders are very clear that such tokens are ‘cost for work carried out’ and act constantly with that place (i.e., aren’t persevering with to advertise and enhance the community in a way that may create Howey expectations). 

  1. Function of the Protected Harbor

No matter whether or not open community tokens characterize funding contracts, “inventory” or different securities, so long as they don’t coincidentally additionally characterize unrelated fairness or debt rights, the securities legal guidelines don’t require that they be regulated as securities past the purpose of “enough decentralization” of the community.

At that time, there isn’t any longer an issuer or different controlling individual that would rationally fulfill the reporting necessities of our disclosure-based securities legal guidelines; furthermore, a lot of the dangers contemplated by the securities legal guidelines are now not related. Though a revenue motive (slightly than a “consumptive” motive) nonetheless prevails, at that time the community is being operated slightly like a common partnership wherein every participant is relying solely by itself efforts, or in any occasion is just not relying predominantly on every other participant(s)’s efforts, to bootstrap the community and obtain income. 

The first goal of the protected harbor is to thus outline when this level—the purpose of “enough decentralization”—is reached. As such, it doesn’t revise or droop the securities legal guidelines, however slightly turns “enough decentralization” from a gloss on the fourth prong of Howey into an goal check offering affordable ex ante readability for when the securities legal guidelines will stop to use to an open community token. 

Overview of Revised Protected Harbor

  1. Disclosure Assertion

The preliminary growth group’s disclosures concerning the venture have to be filed with the Fee and embody particular contractual undertakings (covenants) for growing and selling the blockchain know-how and community. In impact, the Disclosure Assertion should set forth the funding contract between the preliminary growth group and the token patrons who’re investing in reliance on the preliminary growth group’s efforts. 

Requiring the preliminary growth group to decide to particular contractual covenants has the good thing about offering token holders with concrete rights and enforceable expectations, whereas additionally enabling the preliminary growth group to ultimately display that it has honored its tasks. The preliminary growth group should protect flexibility to experiment, be taught and iterate in accordance with the rules of agile software program growth by constructing affordable discretionary requirements into the covenants and enabling token holders to approve materials modifications to the covenants with a token-based or different affordable governance mechanism. 

  1. Community Maturity

Community Maturity is achieved when the preliminary growth group: 

  • has carried out in all materials respects the funding contract related to the tokens;
  • doesn’t economically management the community (owns lower than 10% of tokens); and
  • doesn’t operationally management the community (owns lower than 10% of the technique of figuring out community consensus).
  1. Community Maturity as Efficiency of the Funding Contract

The preliminary growth group’s success in all materials respects of its guarantees to token patrons is one essential side of measuring Community Maturity.

To the extent that guarantees go unperformed, there could stay an funding contract related to the tokens requiring them to be handled as securities.

Efficiency of the funding contract will are inclined to coincide with achievement of “enough decentralization”—in any case, what the preliminary growth group promised to construct was a decentralized blockchain community!

  1. Community Maturity as Lack of Financial Management

If the preliminary growth group nonetheless owns a cloth share of tokens, token patrons could moderately anticipate the group’s efforts to stay the predominant issue affecting token value. Armed with substantial network-specific experience and a token war-chest, the preliminary growth group has each the facility and incentive to extend token worth, and token patrons will search to revenue from the group’s efforts.

Thus, even within the absence of any guarantees, the Howey check can nonetheless be glad if the preliminary growth group owns substantial tokens. 

Quick-swing buying and selling, insider buying and selling and different manipulative or self-interested buying and selling by a significant token holder additionally threatens the financial integrity of the community. The preliminary growth group’s energy to have interaction in such financial assaults is a type of “financial management” that permits coercion of different community individuals, unfairly swaying the result of contentious laborious forks and different governance disputes. The securities legal guidelines are a bulwark towards such manipulative and self-interested habits by asymmetrically highly effective community individuals and will proceed making use of till the community is sufficiently decentralized. 

The edge of 10% possession of present tokens has been chosen to trace Part 16’s share threshold for outlining an “insider” of a public firm. In idea, a decrease threshold (5%) or a better threshold might be chosen (20%-50%). Nevertheless, a protected harbor ought to doubtless err on the aspect of being conservative. 

  1. Community Maturity as Lack of Operational Management

As , a blockchain community is operated on a peer-to-peer foundation by computer systems working a software program consumer which processes transactions in accordance with a set of consensus guidelines. The consensus guidelines decide which set of chained blocks is agreed by nodes to represent the canonical blockchain for that community. 

Whether or not the facility to find out consensus is predicated on hashrate, token stake, chief choice or a type of per capita voting, the facility of every participant to contribute to consensus on a given community at a given time is measurable. We seek advice from this because the “consensus energy” for a community. 

Possession of considerable consensus energy is usually a type of operational management over a community. If the preliminary growth group beneficially owns 10% or extra of the consensus energy of the community, the community is probably not sufficiently decentralized, and securities legal guidelines should apply. 

Operational management of the community creates incentives, expectations and potentials for abuse by the event group. The management of a lot consensus energy may allow the event group to strongly affect governance selections, and doubtlessly even to assault the blockchain community for its personal profit. Token patrons could moderately anticipate that an preliminary growth group with a lot operational energy will stay the predominant driver of future token income, satisfying Howey and triggering the securities legal guidelines. 

In fact, in proof-of-stake networks, operational management and financial management would be the identical, assuming the preliminary growth group chooses to stake its tokens; in such circumstances, the tokens could also be “inventory” and the securities legal guidelines could also be much more strongly implicated. 

  1. DAPPs, DAOs, and so forth.

DAPPs, DAOs and different Open Networks which should not have their very own unique blockchain also needs to be eligible for the protected harbor. The revised protected harbor accommodates this chance. 

  1. Secondary Market Laws Apply to Securities Intermediaries, Not P2P Transactions

Earlier than enough decentralization is achieved, tokens will likely be handled as representing securities, and each main and secondary market transactions in tokens will likely be regulated below the securities legal guidelines. Thus, the Change Act can also apply to such tokens. 

Thus, in tandem with adopting the protected harbor, the Fee ought to make clear how rules pertaining to secondary markets in securities apply to open community tokens previous to the purpose of Community Maturity. The Blockstack Regulation A+ providing of STX tokens supplies a wonderful start line for such clarification, and my proposal right here takes inspiration from lots of the positions Blockstack adopted in pursuing qualification of that providing.[15] 

Blockchain is meant to be a know-how facilitating peer-to-peer, disintermediated transactions in tokens. Most secondary market securities rules are aimed toward securities intermediaries. This blissful dichotomy suggests the best path ahead for the Fee: 

  • make clear and make sure by way of steering the legality of pure, off-exchange, disintermediated P2P buying and selling of tokens representing funding contracts; 
  • make clear and make sure by way of steering that blockchain community nodes is not going to be thought-about broker-dealers or trade operators solely by advantage of receiving tokens as “block rewards” from the community for transaction validation and block manufacturing exercise;
  • make clear and make sure both that:
    • funding contracts is not going to be thought-about “fairness securities” for functions of Part 12(g) of the Change Act or 
    • a Regulation A+ providing of a token representing an funding contract is not going to require reliance on a switch agent with a view to toll the applying of 12(g)[16] 
  • make clear and make sure that the third-party clearing guidelines for ATSs don’t apply to trades settled on-chain (and thus which don’t contain counterparty danger posed by the buying and selling events to at least one one other); and
  • make clear and make sure by way of steering that smart-contract-based “decentralized exchanges” which can be really autonomous, non-custodial and peer-to-peer, resembling these implementing the Uniswap and 0x protocols, aren’t required to be registered as securities exchanges or ATSs solely by advantage of the truth that individuals could make the most of them to commerce in tokens representing funding contracts.

Beneath my proposal, centralized, custodial cryptocurrency exchanges facilitating trades in tokens representing funding contracts, in addition to individuals performing as typical broker-dealers for such tokens, would stay topic to securities rules. That is applicable, since within the present, very evenly regulated atmosphere for such exchanges, fraud, abuse, lack of funds, front-running, wash-trading and different dangerous actions are alleged to be commonplace. Subjecting such intermediaries to rules and reining-in their dangerous habits is just not dangerous to the meant functions and functioning of blockchain know-how. 

Equally, points of the Change Act like Part 16 and Part 13 needs to be relevant to open community tokens previous to Community Maturity, with a view to forestall self-serving workouts of financial management by outsiders in search of to have interaction in hostile takeovers of the community and insiders in search of to revenue from info asymmetries. The current WeWork scandal, whereby self-dealing on the a part of sure of the corporate’s govt officers was solely uncovered when WeWork wanted to reveal its insider transactions in SEC filings as a prelude to getting access to the general public capital markets, is merely the latest reminder that “daylight is one of the best disinfectant” towards poisonous governance.

Blockchain growth groups are not any much less vulnerable to such self-dealing than company ones.

Equally, open networks previous to reaching Community Maturity can also be inclined to the type of “greenmail” and different hostile acquisition assaults which the Williams Act was designed to forestall, significantly when the consensus energy of such open networks is predicated on proof-of-stake; accordingly, the applying of Part 13 could also be applicable. 

No Three-Yr Exemption Interval

Respectfully, there’s one side of the prior model of the protected harbor which I discover significantly objectionable: the three-year interval wherein tokens could be exempted nearly totally from the securities legal guidelines.

I imagine this may be counterproductive. By treating token-based securities financings in another way from typical securities financings, such an strategy is unfair each to conventional securities issuers and to individuals in blockchain networks that now not or by no means did implicate the securities legal guidelines.

The important perception behind Director Hinman’s “sufficiently decentralized” gloss on Howey is that decentralized networks are particular and performance as a public commons not implicating the securities legal guidelines. Blockchain tokens which can be decentralized and autonomous characterize a public good which is extraordinarily tough to create and the variations of which from abnormal, centrally managed applied sciences needs to be revered by our regulation. 

  1. Three-Yr Exemption Would Distort the Capital Markets with Regulatory Arbitrage

Corporations like Kik and Telegram, each of which the Fee is at the moment litigating towards, have basically used token choices as non-equity-dilutive alternate options to conventional capital-raising. Within the first case, abnormal retail buyers suffered huge losses, and within the second case, the Fee is in search of an injunction to forestall related losses. There isn’t any motive why the federal government ought to regulate such capital-raising any in another way from different company financing strategies.

Doing so would create a perverse incentive for all corporations to make use of token-based financing merely with a view to hold tempo with opponents who would face a lighter regulatory load as a result of they raised cash by promoting tokens as an alternative of inventory. Blockchains are cool, however they aren’t so cool that the federal government ought to subsidize their creation by way of regulatory arbitrage. 

  1. Three-Yr Exemption Would Encourage Meritless Copies and Forks Which Devalue Present Token Economies

Moreover, there are various forks and copies of decentralized blockchains which supply little in the best way of innovation, however have disrupted present networks for the acquire of a only a few people who re-centralize management over the brand new chain. A 3-year protected harbor would solely embolden such value-grabbing initiatives, which might be capable of function for a interval of three years with out the burdens of securities legal guidelines—lengthy sufficient to show each member of the event group into somebody very rich, even when the venture in the end fails and plenty of retail buyers are harmed. 

Usually, any protected harbor ought to nonetheless respect the specialness of present sufficiently decentralized blockchain networks and the self-sacrifice and monetary restraint exercised by growth groups using a “honest launch” which by no means implicated securities legal guidelines within the first place. The individuals in such blockchain experiments have endured many trials and tribulations within the pursuit of really decentralized options. 

For instance, the event group behind Ethereum decentralized the community, and thus transitioned ETH from safety to a non-security, by steadily abnegating its personal energy and spreading funding amongst varied unbiased growth groups. Such decentralization comes at the price of pace, coordination, advertising and different advantages[17], and ETH holders have borne that value for years.

As one other instance, the builders of the fair-launched blockchain Grin labored on a largely uncompensated foundation to create and periodically replace the community, partially in order that the securities legal guidelines wouldn’t be implicated in Grin. 

  1. Three-Yr Exemption Is Not Essential to Obtain Enough Decentralization

The three-year interval is just not mandatory to realize decentralization. First, it’s price observing: securities are literally slightly good at buying and selling and have a popularity for doing so!

Nevertheless, as I steered within the prior part of this letter, the Fee can do some issues—far much less dramatic than making a three-year open season on “HoweyCoins”—to assist enhance the state of cryptosecurities rails. 

As a non-exhaustive listing: The Fee may enable a blockchain to serve the position of a switch agent in Regulation A+, may make clear that true uncontrolled DEXs which merely facilitate P2P trades aren’t required to register as securities exchanges/ATSs and will present applicable reduction to the third-party clearing guidelines for ATSs which can be using immediate on-chain settlement. Extra centralized exchanges can also, ought to and can construct out correctly regulated and licensed cryptosecurities rails to additional facilitate such buying and selling. 

Thus, open community tokens can commerce very freely, as securities, for years, and enough liquidity might be achieved with no three-year carveout to the securities legal guidelines. 


I thanks sincerely for contemplating my ideas and on your persevering with advocacy on behalf of blockchain applied sciences. I’d welcome the chance to work with you, the opposite Commissioners and/or different members of the Workers in figuring out how greatest to advance this trigger with new guidelines, rules and legal guidelines.

In fact, I’m however one voice on these matters.

I’d urge the Fee, the Commissioners and different Workers, each of their official and private capacities, to take part within the open-source tradition of blockchain by doing as a lot of their considering on these topics in public as moderately doable. 


  1. A set of my thought items could also be discovered at
  4. SEC Memorandum of Regulation in Assist of Software for Preliminary Injunction, SEC vs. Telegram,
  5. Cf. Lewis R. Cohen, Ain’t Misbehavin’: An Examination Of Broadway Tickets And Blockchain Tokens, 65 Wayne L. Rev. 81 (2019).
  6. See Gabriel Shapiro, Measurement Does Matter – Half 1: A Philosophy of Securities Legal guidelines for Tokenized Networks (
  7. See SEC Order – AirFox ( “The phrases of AirFox’s preliminary coin providing presupposed to require purchasers to agree that they have been shopping for AirTokens for his or her utility as a medium of trade for cell airtime, and never as an funding or a safety[…]Regardless of the reference to AirTokens as a medium of trade, on the time of the ICO, buyers bought AirTokens primarily based upon anticipation that the worth of the tokens would rise by way of AirFox’s future managerial and entrepreneurial efforts.”
  8. See e.g. Elaine A. Welle, Freedom of Contract and the Securities Legal guidelines: Opting Out of Securities Regulation by Non-public Settlement, 56 Wash. & Lee L. Rev. 519 (1999), wlulr/vol56/iss2/5
  9. See Tcherepnin v. Knight, 389 U.S. 332, 336 (1967): “[W]e are guided by the acquainted canon of statutory building that remedial laws needs to be construed broadly to effectuate its functions. The Securities Change Act fairly clearly falls into the class of remedial laws. [Footnote 10] One among its central functions is to guard buyers by way of the requirement of full disclosure by issuers of securities, and the definition of safety in § 3(a)(10) essentially determines the lessons of investments and buyers which is able to obtain the Act’s protections.”
  10. United Housing Basis, Inc. v. Forman, 421 U.S. 837 (1975). See additionally SEC Paragon Coin Order ( “In analyzing whether or not one thing is a safety, ‘type needs to be disregarded for substance,’ Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), ‘and the emphasis needs to be on financial realities underlying a transaction, and never on the identify appended thereto.’ Forman, 421 U.S. at 849.
  11. Forman 421 U.S. at 849.
  12. See Gabriel Shapiro, Measurement Does Matter – Half 1: A Philosophy of Securities Legal guidelines for Tokenized Networks by Gabriel Shapiro (
  13. See e.g. Stan Larimer, Bitcoin and the Three Legal guidelines of Robotics ( and Daniel Larimer, Overpaying For Safety by (
  14. See e.g., Pleasant Energy Co. LLC, 49 F. Supp.2nd at 1369.
  15. See
  16. The Workers also needs to think about liberalizing Regulation A+ in extra methods (resembling by rising the general public float ceiling below the 12(g) exemption), however ought to achieve this throughout the board for all Regulation A+ choices, not merely tokens.
  17. Ben Edgington, Ethereum’s ‘Bazaar’ Growth Mannequin Will Pay Off in 2020 (

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