Recently, the US San Francisco law firm Velton Zegelman PC released the "Howey Test" report concerning Chinese blockchain project Bytom. Having reviewed and analyzed the technical white book and economic white paper of Bytom, as well as the legal statement of the "Token Sale Documents" from the Chinese Zhonglun W&D Law Firm, Velton Zegelman PC concluded that Bytom did not comprise any security and would not be included under the SEC's supervision.
In August 27, the US Securities Regulatory Commission carried out the research, as a part of the DAO project, and suggested the case-by-case evaluation of the issue. In the middle of September, different Asian countries such as China and South Korea implemented the securities regulation. After the burst of uproar caused by the project, China's first case in the United States was declared to be compliant with the general regulations, what marked the milestone of the non-securities blockchain project.
China's first case in the United States, considered to be compliant with non-securities sector chain projects with milestones.
The United States Congress defined "security" in the Securities Act of 1933 and the Securities Exchange Act of 1934: In the United States, the issuance and sale of all securities must be registered at the Securities Commission or are exempt from the registration requirements. The "Howey Test" is an effective means of determining whether a financial instrument is an "investment contract" and a "securities". It contains four elements:
- Investment of Money;
- Common Enterprise;
- Expectation of Profits;
- Solely from the Efforts of Others.
The analysis of BTM from Velton-Zegelman PC is below, based on each Howey factor:
Investment of Money. Under Howey, and the case law following it, an investment of money may include not only the provision of capital, assets, and cash, but also goods, services, or a promissory note. Since the purchasers of BTM are going to pay for them with cryptocurrency, there is no doubt that there will be an investment of money in exchange for BTM. Thus, the first prong of "Howey Test" is satisfied.
Common Enterprise. Different judicial courts in the US use different tests to analyze whether a common enterprise exists. Three approaches predominate: (i) Horizontal Commonality; (ii) Narrow Vertical Commonality; and (iii) Broad Vertical Commonality. In summation, the second prong of the "Howey Test", under the Broad Vertical Approach, is likely not satisfied under the Broad Vertical Approach, because the success of the investor is not tied to the success of the promoter.
Expectation of Profits. A return or profit does not mean that the investment contract is a security.
Solely from the Efforts of Others. It is evident that expected profits are gained from the use of BTM and not merely by holding BTM.
Based on the analysis above, Velton-Zegelman PC believes that current iteration of the Bytom White Papers is not likely to be deemed a security under applicable US laws because all four factors must be met for a token to be considered an investment contract and to invoke the protection of the Securities Act and Exchange Act. However, the client advises Bytom to consult with them often, as the legal landscape is changing and being updated, voted, or challenged often by various competing forces at that time. Bytom is advised to act with caution and attention, and to stay abreast of the issues involved in the blockchain and cryptocurrency industry.
"If blockchain or fintech companies want to be the mainstream, they must be legal and focus on the technological innovation. We will boost both technological innovation and compliance business of Bytom and promote the steady, sustainable and lasting development of Bytom," believes Duan Xinxing, co-founder of Bytom.
Bytom submits to the overseas law firm Bytom's organizational structure design and operations, marking a key step for the Bytom project in the global harmonization process. It is the first Chinese public blockchain project do this. The "Howey Test" is what the US Securities and Exchange Commission determine, whether an investment contract has the authority of the security standards. It is a milestone sense for Bytom through "Howey Test" proved to belong to non-securities.
Company name: Bytom
Company site: http://bytom.io/
Company contacts: [email protected]