Money Stuff: Tokens Are Not Securities

Programming note: Money Stuff will be off tomorrow and Friday, back on Monday.

In the late 2010s and early 2020s, you could raise hundreds of millions of dollars for a business by selling “tokens” “of” the business, tokens that were in some loose but definite sense linked to the economic success of that business. You could go around saying “we are launching the next hot crypto protocol, and it is going to be ‘a life-changing, you know, world-altering protocol that’s gonna replace all the big banks,’ and when it does that the tokens of the protocol will be worth a lot of money, so you should buy some.” People would believe you, so they would buy the tokens, from you, and then you would have money to build your business. If you built the business successfully, the tokens probably would be worth a lot of money, and the people who bought them would get a nice return on their investment.

The US Securities and Exchange Commission, in the late 2010s and early 2020s, objected to this state of affairs. Its objection had two main strands:

1. That proposition — “give us money to build a business, and you’ll get rich when we succeed” — is obviously a securities offering, there are rules that regulate the registration and disclosure of securities offerings, and the crypto businesses tended not to follow those rules.
2. Also sometimes the people who raised the money would steal it, or would lie about the business they were building, or would otherwise commit what the SEC would call securities fraud.

The SEC pursued the first objection in an interesting way. It sued a few token issuers for violating securities laws, some because they were lying and stealing the money, but others purely for technical reasons, because they had sold tokens without following SEC registration and disclosure requirements. But the SEC also went after crypto exchanges. The theory was that, because these token offerings were securities offerings, therefore the tokens were securities. Therefore, the exchanges that listed the tokens had to register with the SEC as national securities exchanges. The crypto exchanges were not registered with the SEC, in part because being a registered national securities exchange would in various ways be impractical for a crypto exchange, and in larger part because the SEC probably wouldn’t let them. 

There was a lot of pushback against the SEC from the crypto industry. Tokens, people argued, are not securities; they are tokens. They are something else, something new, not subject to SEC jurisdiction. The strong form of this argument would be: “Tokens are not securities, so token offerings are not securities offerings, so we don’t have to register them or follow SEC disclosure requirements.” Token issuers sometimes made this argument.

A weaker form of the argument would be: “Okay, sure, selling tokens to raise money to build a business does look like a securities offering. So, fine, those offerings should comply with SEC rules, either by registering them or by meeting some exemption from registration (like selling only to foreigners, or only to accredited investors). But just because the token offering is a securities offering, that doesn’t make the token a security. When a crypto issuer sells tokens to raise money, sure, it should have to follow SEC rules, because it is raising money from investors and undertaking to build a business. But when those tokens start trading, they are just tokens; people buy them for all sorts of reasons, not necessarily because anyone promised to build a business.” 

I never found this argument entirely convincing, but it has a real logic to it. Crypto issuers with careful lawyers followed this logic: They would raise money from institutional investors in exempt securities offerings by selling them SAFTs, “simple agreements for future tokens,” and then once they had built the business out they would deliver the tokens, which the investors could go sell on a crypto exchange. The SAFT was a securities offering, they argued, but the underlying tokens were not. 

And crypto exchanges definitely followed this logic: “Hey, whatever some issuer did or did not promise when it was raising money is not our problem, but now these tokens are just tokens and we want to trade them without worrying about securities law.”

The crypto industry had some wins and losses in court, but in the broader sense it definitively won the argument: Donald Trump promised to roll back crypto regulation, the crypto industry mostly supported him, he won the election, and yesterday the SEC announced:

The Securities and Exchange Commission (SEC) today issued an interpretation clarifying how the federal securities laws apply to certain crypto assets and transactions involving crypto assets. ...

“After more than a decade of uncertainty, this interpretation will provide market participants with a clear understanding of how the Commission treats crypto assets under federal securities laws. This is what regulatory agencies are supposed to do: draw clear lines in clear terms,” said SEC Chairman Paul S. Atkins. “It also acknowledges what the former administration refused to recognize – that most crypto assets are not themselves securities. And it reflects the reality that investment contracts can come to an end. This effort serves as an important bridge for entrepreneurs and investors as Congress works to advance bipartisan market structure legislation, which I look forward to implementing with Chairman Selig in the near future.”

Here is the interpretation. Some highlights:

1. Most tokens you can think of, including “Aptos (APT); Avalanche (AVAX); Bitcoin (BTC); Bitcoin Cash (BCH); Cardano (ADA); Chainlink (LINK); Dogecoin (DOGE); Ether (ETH); Hedera (HBAR); Litecoin (LTC); Polkadot (DOT); Shiba Inu (SHIB); Solana (SOL); Stellar (XLM); Tezos (XTZ); and XRP (XRP)” are “digital commodities,” and thus not securities.
2. Most nonfungible tokens you can think of, including “CryptoPunks, Chromie Squiggles, Fan Tokens, WIF, and VCOIN” are “digital collectibles,” and thus not securities.
3. Payment stablecoins are not securities.
4. Shares of stock wrapped in tokens are obviously securities, come on man.
5. Mining and staking, in which token holders can lock up their tokens to receive token rewards, are not securities. (Previously the SEC argued that staking programs are securities.)

But the main thing is probably that the SEC adopted the “securities offerings don’t make securities” theory. The relevant Supreme Court case, SEC v. W.J. Howey Co., defines when something is an “investment contract” and thus a security. Yesterday’s interpretation says:

A non-security crypto asset becomes subject to an investment contract when an issuer offers it by inducing an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts from which a purchaser would reasonably expect to derive profits. 

The issuer’s representations or promises to engage in essential managerial efforts from which a purchaser would reasonably expect to derive profits, when combined with an investment of money in a common enterprise, creates an investment contract under the Howey test. As is the case with other non-security assets, the fact that a non-security crypto asset is subject to an investment contract does not transform the non-security crypto asset itself into a security. … 

A non-security crypto asset that was offered and sold subject to an investment contract does not necessarily remain subject to the associated investment contract in perpetuity. 

The token can stop being a security in two ways: The issuer can fulfill its promises by completing “the essential managerial efforts it represented or promised it would undertake,” or it can give up, so that it “become[s] clear to investors that the issuer has neither conducted the essential managerial efforts it represented or promised it would undertake nor indicated that it still intends to conduct such efforts.”

Thus, loosely speaking, a crypto business can raise money to build its crypto protocol, but that is probably a securities offering. (Perhaps it’s a SAFT to institutional investors, so exempt from SEC registration.) But once it builds its protocol, the tokens can trade freely without being securities; the exchanges are fine. Also if it doesn’t build much that’s fine too. In success or failure, it’s only a security for a little while.

I guess I would make two points here. One is that it is a somewhat novel theory of securities law, something like “startup crypto businesses are subject to securities law but mature ones aren’t.” There is a real logic to this; in theory, mature crypto businesses are supposed to be decentralized, that is, not controlled by their founders and promoters, so their tokens probably shouldn’t be securities. (In practice this is not always true. [1] ) But implementation will be strange: If you are the founder and leading proponent of a crypto protocol, and you control a lot of its tokens, and you go around telling everyone that it is the future of finance, and you are lying, then there is some mysterious point at which your lies transition from “securities fraud” to “not the SEC’s problem.”

The other point I would make is: In the late 2010s and early 2020s you could raise hundreds of millions of dollars for a business by selling “tokens” “of” the business, but the SEC didn’t like it. In 2026, the SEC is fine with it, but can you still do it? The crypto boom is, uh, not what it used to be. We’ve got prediction markets and AI now. The desire to invest hundreds of millions of dollars in the next world-changing crypto protocol seems to have faded abit. When crypto was booming, it was legally ambiguous in the US; now its legal status is clearer, but how much will that matter?

I wrote yesterday that “a possibly good business niche would be ‘private equity front.’” You’ve got family-owned small businesses that want to cash out, you’ve got a private equity firm that is the highest bidder, but you’ve got broad public opprobrium against private equity ownership. What you want, I wrote, is a Private Equity Concealment Consultant to structure a deal:

The founder-grandson sells the private equity firm a prepaid total return swap on his shares and enters into a software supply contract, or he enters into a management services agreement with the PE firm that gives it certain control rights and a variable claim on the company’s cash flows, etc. etc. etc., but he still “owns” the “shares” and has his picture on the billboards. ... This seems like it would create a lot of value, somebody should do it, and I know I am going to get emails saying that somebody did.

A couple of readers pointed out that my basic model here — a private equity firm doesn’t “buy” a “company,” but rather enters into some sort of service agreement that entitles it to much of the economics of that company — is pretty common in private-equity rollups of medical, accounting and legal practices. My point yesterday was that private equity ownership is informally unpopular, so it would be good marketing and public relations to structure around it. But in some areas private equity ownership is illegal, so you really have to structure around it. The structuring takes the form of a “managed service organization” that does not buy the company but that enters into some contracts to acquire much of its economics. Here’s a Financial Times article from January about a possible quasi-buyout of a law firm:

It is similar to models that have already been used to prise open medical practices and accounting firms to private equity ownership in recent years. ...

The structure under consideration would split [the firm] into two parts: a business giving advice to clients that is fully owned by its lawyers, and a separate “managed service organisation” that the lawyer-owned firm would buy services from. That could include back-office work, licensing its brand and buying IT services. Investors could buy a stake in the MSO, giving them a revenue stream designed to be attractive to private equity investors.

The lawyers “own” the “firm” for ethical purposes, but the private equity firm gets a share of the profits and the lawyers get an up-front payment.

Separately, another reader emailed me about American Operator, which is not quite the business I proposed, but definitely playing in a similar anti-private-equity-private-equity-rollup space. Here’s a New York Post article from last week:

William Fry, who launched American Operator late last year, is trying to offer a fresh alternative.

His Austin-based firm helps operators — typically a longtime employee or industry veteran — co-purchase retiring owners’ businesses. With AO’s help, the operators starts with 10% equity and a clear path to 70% majority ownership. Meanwhile, the seller gets their liquidity event and the business stays local.

Unlike PE, which buys to flip, often selling to another PE company, American Operator has no intention of selling the businesses it buys. Their goal is to keep Main Street in the hands of Main Street.

I just think that, like, Blackstone Group could also come up with a product in which (1) they buy 90% ownership of local companies and (2) they say “our goal is to keep Main Street in the hands of Main Street.”

I write occasionally that Elon Musk is our foremost modern theorist of legal realism. “Legal realism” is the theory, associated with Karl Llewellyn, that “what officials do about disputes is the law itself,” and that “rules are only important so far as they help you see or predict what judges will do or help you to get judges to do something.” [2] Musk, it seems to me, takes this theory more seriously and applies it more creatively than any lawyer. By which I mean, when lawyers come to him and tell him that something he wants to do is against the rules, he is world-historically good at saying “well what are they gonna do about it?”

In that vein, if I ever teach Securities Regulation at a law school, [3]  this Financial Times article is going to be the reading assignment for the first class:

Lawyers for Elon Musk sought to negotiate a settlement of a Securities and Exchange Commission case accusing him of failing to properly disclose his Twitter stake without involving the Wall Street watchdog’s lawyers, court records show.

At a hearing on the case in Washington federal court earlier this month, Sarah Concannon, a lawyer for Musk, informed the judge that settlement negotiations over the case had been ongoing for some time, but that opposing lawyers from the SEC “were not fully read in on that”. …

It was not clear who Musk’s lawyers had been holding settlement talks with. Excluding the agency that filed the case from settlement discussions would be unusual, and the exchange raises questions about whether Musk or his lawyers were tapping relationships with other officials in the Trump administration in an effort to dispense with the case. …

A person familiar with the talks denied the White House was involved and said discussions were held with higher echelons of the SEC.

“If you’re being sued by the SEC, and you want to settle, you negotiate the settlement with the SEC lawyers who are suing you,” is what most lawyers would tell you, but it’s not what legal realism would tell Elon Musk!

I have consistently argued around here that it can be good, for your financial career, to lose a billion dollars. Losing a billion dollars will probably get you fired from your current job, but it will make you intriguing to potential future employers: Someone trusted you with a billion dollars, you took big risks with it, and presumably you have learned something from your mistakes. A lot of potential employers — hedge funds, but also venture investors — are looking to hire risk-takers, and if nothing else you have proven that you’re that.

I am always half-joking about this, but only half. This logic is plausible, it kind of works, it has kind of worked for a long time, and it has almost become conventional wisdom. The industries that seek out and reward risk-takers have long been willing, even eager, to give second chances to big risk-takers whose risks didn’t work out. Failure, in tech startups and sometimes in hedge funds, can be a badge of honor.

Recently, though, I have made a different though related argument, which is that it can be good, for your financial career, to develop a reputation as a scammer. Unlike the thing about losing a billion dollars, this strikes me as rather novel, and less logically compelling. Still? I wrote a few months ago:

Traditionally, if you took $100 million of people’s money, and you never gave it back, and when they asked for it back you were like “teehee I know I’m such a rascal aren’t I,” you would have a hard time raising new money. There would be newspaper articles about your failed venture and your disgruntled investors, and if you wanted to find new investors for a new venture, you might have to change your name or move to another country or at least explain yourself. Whereas now, if you take $100 million of people’s money and never give it back and get stories written about you, you can go out to new investors and show them the stories and be like “lol look what a rascal I am,” and they will be like “oh man you are a rascal, here’s $200 million.”

And we have talked a few times about the mostly-joking revival of Enron Corp.; I once wrote that “‘Synonymous with willful corporate fraud and corruption’ is the sort of meme that, in 2024, is valuable.”

These two points shade into each other: If you lose a lot of other people’s money honestly, some of those people might accuse you of fraud; if you take a lot of people’s money by fraud, there is probably some core of legitimate risk-taking. It is not always easy to tell, from the outside, whether some disaster is better characterized as “that guy lost a lot of money for investors” or “that guy stole a lot of money from investors.” But a few years ago, I would have said something like “yeah sure it’s good to lose a billion dollars honestly, but if there is any taint of illegality — certainly if you are prosecuted for it — that’s going to make it hard to recover.” Now I would never say that; that’s dumb.

Anyway the Wall Street Journal checks in with Trevor Milton:

Early [in 2025], Nikola, the hydrogen truck company Milton had founded, filed for bankruptcy. Milton had left Nikola in 2020 under a cloud, and by 2022 had been convicted of defrauding the company’s investors with what prosecutors said were his repeated lies about the development of the company’s zero-emissions trucks and technology. He faced a four-year prison term—he was free on appeal—and federal prosecutors were seeking roughly $676 million in restitution from him.

It was wiped away with a phone call. In March 2025, Trump called Milton to tell him he had signed an unconditional pardon. Milton had styled himself as a political victim of the Biden administration, and Trump agreed. ...

Now, Milton has joined an exclusive group of post-pardon businesspeople, seemingly anointed by Trump’s favor. “I walk into meetings now, and I’ll get high-fives from the most wealthy people in the world,” he said. “They’re like, ‘Welcome to the club. You can withstand the fire. We can trust you now.’”

“We can trust you now” because a jury convicted you of fraud. We really do live in interesting times. Anyway:

Milton has wasted little time embarking on his second act. He’s now CEO of SyberJet Aircraft, an ailing jet manufacturer, which he said he purchased with an investment group. He brought on dozens of former Nikola staffers to rejuvenate it. “I love to find products that are unreal and need someone with vision or guts to be able to bring it to market,” he said. 

Back in 2021, when Nikola released a report saying that Milton had not been entirely truthful about its electric trucks, I wrote:

That is, like, startups, man. What you want, when you invest in a startup, is a founder who combines (1) an insanely ambitious vision with (2) a clear-eyed plan to make it come true and (3) the ability to make people believe in the vision now. … The goal is to get the investor to see the future, so she’ll give you money today, so that you can build the future tomorrow.

Milton is apparently good at that.

If you work in trading or investment banking at a big bank, and you complete some big project successfully, what generally happens is that the project produces money and you get a big bonus. If you work in the technology infrastructure and back-office parts of the bank, and you complete some big project successfully, what happens, at best, is that everything at the bank runs a bit more smoothly. Or sometimes the big project is just “prevent things from running less smoothly.” The benefits are not as tangible, so you will have to seek fulfillment in other ways.

Here’s a Financial Times article about how UBS Group AG “has completed the most complex stage of its integration of Credit Suisse, three years after agreeing to buy it, by “complet[ing] the transfer of 1.2mn of its former rival’s clients on to its own systems after a 10-month operation involving more than 80,000 tests and 132,000 hours of staff training.” If you do this transition really really well then what will happen is pretty much that you won’t lose track of anyone’s money, which is good, but not particularly exciting. You’re not supposed to lose track of anyone’s money. Still there is some excitement:

Executives said that as the project progressed their teams marked milestones in the changeover by ringing four Swiss cowbells, each so large that two people were required to hold them.

The ringing of the bells, modelled on those worn by cows in the Swiss Alps, became a ritual as the bank completed months of testing, overnight checks and live migrations.

It’s something I guess.

I used to be a derivatives structurer at an investment bank, and one thing that you learn as a derivatives structurer is how to construct and appreciate good acronyms for financial instruments. Good job SES:

European satellite operator SES SA, a rival to Elon Musk’s Starlink network, has launched the sale of unusually structured hybrid bonds, which it hopes will help it reclaim an investment-grade credit rating.

The company aims to raise an expected €500 million ($576 million) by issuing so-called Space bonds — subordinated perpetual with automatic conversion events — for which investors have placed more than €3 billion of bids so far, said a person familiar with the matter who asked not to be identified.

SPACE, “subordinated perpetual with automatic conversion events,” love it. Here’s Fitch’s description; they’re sort of CoCos, but with a good brand name.

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